When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Sensata Technologies Holding (NYSE:ST), the trends above didn't look too great.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Sensata Technologies Holding:

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

0.076 = US$495m ÷ (US$7.3b - US$807m) (Based on the trailing twelve months to September 2024).

Therefore, Sensata Technologies Holding has an ROCE of 7.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 11%.

In the above chart we have measured Sensata Technologies Holding's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Sensata Technologies Holding .

So How Is Sensata Technologies Holding's ROCE Trending?

We are a bit worried about the trend of returns on capital at Sensata Technologies Holding. About five years ago, returns on capital were 10%, however they're now substantially lower than that as we saw above. 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. If these trends continue, we wouldn't expect Sensata Technologies Holding to turn into a multi-bagger.

What We Can Learn From Sensata Technologies Holding's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 32% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Sensata Technologies Holding does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

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.