If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Micro-Mechanics (Holdings) (SGX:5DD), we weren't too hopeful.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Micro-Mechanics (Holdings) is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.21 = S$11m ÷ (S$62m - S$8.5m) (Based on the trailing twelve months to September 2023).

So, Micro-Mechanics (Holdings) has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 6.4% earned by companies in a similar industry.

Check out our latest analysis for Micro-Mechanics (Holdings)

In the above chart we have measured Micro-Mechanics (Holdings)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Micro-Mechanics (Holdings).

What The Trend Of ROCE Can Tell Us

In terms of Micro-Mechanics (Holdings)'s historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 30% five years ago but has since fallen to 21%. In addition to that, Micro-Mechanics (Holdings) is now employing 22% less capital than it was five years ago. 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 Micro-Mechanics (Holdings)'s ROCE

In summary, it's unfortunate that Micro-Mechanics (Holdings) is shrinking its capital base and also generating lower returns. Despite the concerning underlying trends, the stock has actually gained 38% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Like most companies, Micro-Mechanics (Holdings) does come with some risks, and we've found 2 warning signs that you should be aware of.

Micro-Mechanics (Holdings) is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.