Seagate Technology Holdings' (NASDAQ:STX) Returns On Capital Tell Us There Is Reason To Feel Uneasy
To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Seagate Technology Holdings (NASDAQ:STX), we weren't too hopeful.
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 Seagate Technology Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0065 = US$30m ÷ (US$7.1b - US$2.5b) (Based on the trailing twelve months to December 2023).
Thus, Seagate Technology Holdings has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 7.5%.
Check out our latest analysis for Seagate Technology Holdings
In the above chart we have measured Seagate Technology Holdings' 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 Seagate Technology Holdings for free.
The Trend Of ROCE
The trend of returns that Seagate Technology Holdings is generating are raising some concerns. To be more specific, today's ROCE was 29% five years ago but has since fallen to 0.6%. On top of that, the business is utilizing 29% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.
The Bottom Line On Seagate Technology Holdings' ROCE
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 142%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
One more thing to note, we've identified 3 warning signs with Seagate Technology Holdings and understanding them should be part of your investment process.
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.
