The Returns On Capital At COLTENE Holding (VTX:CLTN) Don't Inspire Confidence
When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, COLTENE Holding (VTX:CLTN) we aren't filled with optimism, but let's investigate further.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on COLTENE Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = CHF20m ÷ (CHF175m - CHF74m) (Based on the trailing twelve months to December 2023).
Thus, COLTENE Holding has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 12% generated by the Medical Equipment industry.
See our latest analysis for COLTENE Holding
Above you can see how the current ROCE for COLTENE Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for COLTENE Holding .
What Does the ROCE Trend For COLTENE Holding Tell Us?
In terms of COLTENE Holding's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 26% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on COLTENE Holding becoming one if things continue as they have.
Another thing to note, COLTENE Holding has a high ratio of current liabilities to total assets of 42%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line
In summary, it's unfortunate that COLTENE Holding is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 32% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
One more thing, we've spotted 2 warning signs facing COLTENE Holding that you might find interesting.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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