Is Newmark Security (LON:NWT) Struggling?
What underlying fundamental trends can indicate that a company might be in decline? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Newmark Security (LON:NWT) we aren't filled with optimism, but let's investigate further.
What is 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. To calculate this metric for Newmark Security, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = UK£604k ÷ (UK£14m - UK£4.6m) (Based on the trailing twelve months to April 2020).
Therefore, Newmark Security has an ROCE of 6.7%. Even though it's in line with the industry average of 7.2%, it's still a low return by itself.
View our latest analysis for Newmark Security
Historical performance is a great place to start when researching a stock so above you can see the gauge for Newmark Security's ROCE against it's prior returns. If you're interested in investigating Newmark Security's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
The trend of ROCE at Newmark Security is showing some signs of weakness. The company used to generate 16% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 36% over that same period. 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.
On a side note, Newmark Security's current liabilities have increased over the last five years to 34% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 6.7%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
What We Can Learn From Newmark Security's ROCE
To see Newmark Security reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 48% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing: We've identified 3 warning signs with Newmark Security (at least 2 which make us uncomfortable) , and understanding these would certainly be useful.
While Newmark Security isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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