IPG Photonics' (NASDAQ:IPGP) Returns On Capital Tell Us There Is Reason To Feel Uneasy
If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. 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 IPG Photonics (NASDAQ:IPGP), we've spotted some signs that it could be struggling, so let's investigate.
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 IPG Photonics:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = US$217m ÷ (US$2.7b - US$250m) (Based on the trailing twelve months to March 2023).
Therefore, IPG Photonics has an ROCE of 9.0%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 13%.
View our latest analysis for IPG Photonics
Above you can see how the current ROCE for IPG Photonics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for IPG Photonics.
What Can We Tell From IPG Photonics' ROCE Trend?
We are a bit worried about the trend of returns on capital at IPG Photonics. Unfortunately the returns on capital have diminished from the 26% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect IPG Photonics to turn into a multi-bagger.
What We Can Learn From IPG Photonics' ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 43% 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.
IPG Photonics does have some risks though, and we've spotted 2 warning signs for IPG Photonics that you might be interested in.
While IPG Photonics 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.
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