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. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at ARC Document Solutions (NYSE:ARC), 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. To calculate this metric for ARC Document Solutions, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = US$16m ÷ (US$315m - US$71m) (Based on the trailing twelve months to March 2022).
So, ARC Document Solutions has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.5%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for ARC Document Solutions' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of ARC Document Solutions, check out these free graphs here.
So How Is ARC Document Solutions' ROCE Trending?
There is reason to be cautious about ARC Document Solutions, given the returns are trending downwards. To be more specific, the ROCE was 8.8% 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. If these trends continue, we wouldn't expect ARC Document Solutions to turn into a multi-bagger.
The Bottom Line
In summary, it's unfortunate that ARC Document Solutions is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you'd like to know about the risks facing ARC Document Solutions, we've discovered 2 warning signs that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.