When researching a stock for investment, what can tell us that the company is in decline? 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 we looked into L.B. Foster (NASDAQ:FSTR), 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 L.B. Foster is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = US$12m ÷ (US$326m - US$84m) (Based on the trailing twelve months to March 2024).
Therefore, L.B. Foster has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 13%.
Above you can see how the current ROCE for L.B. Foster compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for L.B. Foster .
The Trend Of ROCE
There is reason to be cautious about L.B. Foster, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 9.7% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on L.B. Foster becoming one if things continue as they have.
The Key Takeaway
In summary, it's unfortunate that L.B. Foster is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 15% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for L.B. Foster (of which 1 is a bit concerning!) that you should know about.
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.
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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.