What underlying fundamental trends can indicate that a company might be in decline? 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 indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Stanley Black & Decker (NYSE:SWK), we weren't too upbeat about how things were going.

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. To calculate this metric for Stanley Black & Decker, this is the formula:

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

0.065 = US$1.1b ÷ (US$22b - US$5.3b) (Based on the trailing twelve months to September 2024).

Therefore, Stanley Black & Decker has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 12%.

In the above chart we have measured Stanley Black & Decker's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Stanley Black & Decker for free.

So How Is Stanley Black & Decker's ROCE Trending?

There is reason to be cautious about Stanley Black & Decker, given the returns are trending downwards. To be more specific, the ROCE was 11% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Stanley Black & Decker becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Stanley Black & Decker is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 44% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Stanley Black & Decker, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

While Stanley Black & Decker isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.