When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at International Game Technology (NYSE:IGT), so let's see why.
Understanding 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. The formula for this calculation on International Game Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = US$414m ÷ (US$13b - US$2.5b) (Based on the trailing twelve months to June 2020).
So, International Game Technology has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.3%.
Above you can see how the current ROCE for International Game Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering International Game Technology here for free.
What Does the ROCE Trend For International Game Technology Tell Us?
The trend of ROCE at International Game Technology is showing some signs of weakness. To be more specific, today's ROCE was 4.9% five years ago but has since fallen to 3.8%. In addition to that, International Game Technology 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 Key Takeaway
In summary, it's unfortunate that International Game Technology is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 22% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
Like most companies, International Game Technology does come with some risks, and we've found 1 warning sign that you should be aware of.
While International Game Technology 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.
This article by Simply Wall St is general in nature. 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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