If we’re looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we’ll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it’s earning less on what it does invest. And from a first read, things don’t look too good at L.B. Foster (NASDAQ:FSTR), so let’s see why.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for L.B. Foster:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.0015 = US$401k ÷ (US$365m – US$97m) (Based on the trailing twelve months to June 2022).
So, L.B. Foster has an ROCE of 0.1%. Ultimately, that’s a low return and it under-performs the Machinery industry average of 10%.
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 report on analyst forecasts for the company.
How Are Returns Trending?
In terms of L.B. Foster’s historical ROCE movements, the trend doesn’t inspire confidence. To be more specific, the ROCE was 1.1% five years ago, but since then it has dropped noticeably. On top of that, it’s worth noting that the amount of capital employed within the business has remained relatively steady. 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. If these trends continue, we wouldn’t expect L.B. Foster to turn into a multi-bagger.
The Bottom Line On L.B. Foster’s ROCE
In summary, it’s unfortunate that L.B. Foster is generating lower returns from the same amount of capital. 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.
If you want to continue researching L.B. Foster, you might be interested to know about the 2 warning signs that our analysis has discovered.
While L.B. Foster may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
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