Investors Could Be Concerned With Viavi Solutions' (NASDAQ:VIAV) Returns On Capital
What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Viavi Solutions (NASDAQ:VIAV), we've spotted some signs that it could be struggling, so let's investigate.
Return On Capital Employed (ROCE): What Is It?
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 Viavi Solutions:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = US$39m ÷ (US$1.9b - US$312m) (Based on the trailing twelve months to December 2023).
Therefore, Viavi Solutions has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Communications industry average of 7.9%.
See our latest analysis for Viavi Solutions
In the above chart we have measured Viavi Solutions' 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 Viavi Solutions for free.
How Are Returns Trending?
There is reason to be cautious about Viavi Solutions, given the returns are trending downwards. To be more specific, the ROCE was 3.4% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Viavi Solutions to turn into a multi-bagger.
In Conclusion...
In summary, it's unfortunate that Viavi Solutions is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 21% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Like most companies, Viavi Solutions does come with some risks, and we've found 3 warning signs that you should be aware of.
While Viavi Solutions 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.
