What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into MRC Global (NYSE:MRC), the trends above didn't look too great.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on MRC Global is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.022 = US$28m ÷ (US$1.7b - US$466m) (Based on the trailing twelve months to June 2021).
Thus, MRC Global has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 11%.
Above you can see how the current ROCE for MRC Global 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 report for MRC Global.
How Are Returns Trending?
In terms of MRC Global's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 2.2% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 35% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.
The Bottom Line On MRC Global's ROCE
In summary, it's unfortunate that MRC Global is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 44% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
MRC Global does have some risks though, and we've spotted 1 warning sign for MRC Global that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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