When considering the selection of stocks for investment, there are discernible indicators that could signal a company’s decline. One of these indicators is the declining return on capital employed (ROCE) and a diminishing capital employed base. This indicates that the company not only reduces its investments but also earns less from those investments. This trend in the case of Seagate Technology Holdings (NASDAQ:STX) raises concerns about the company’s performance.
Return on Capital Employed (ROCE) is a measure of the pre-tax income a company earns as a percentage of the capital invested in its business. For Seagate Technology Holdings, the ROCE is calculated as follows: Return on Capital Employed = Earnings Before Interest and Tax (EBIT) รท (Total Assets – Current Liabilities). As of March 2024, Seagate Technology Holdings has an ROCE of 5.0%, lower than the industry average of 8.3%, indicating underperformance compared to its peers.
An examination of Seagate Technology Holdings’ historical ROCE trend reveals a significant decline. The company previously generated a 26% return on its capital five years ago, but has since decreased. Additionally, the company is now employing 37% less capital than it was five years ago. When both ROCE and capital employed are diminishing, it may indicate a mature company in structural decline.
The ratio of current liabilities to total assets has also increased to 43%, which has impacted the ROCE. This means that a significant portion of the business is being funded by short-term creditors, posing its own risks.
The combination of lower returns and decreasing capital employed does not inspire confidence in Seagate Technology Holdings despite the stock’s significant growth over the last five years. Additional warning signs to consider include solid earnings, impressive returns on equity, company valuation, fair value estimates, risks, dividends, insider transactions, and financial health.
In conclusion, the indicators of declining ROCE and capital employed at Seagate Technology Holdings raise concerns about the company’s financial health and long-term prospects. It is essential for investors to carefully consider these factors before making any investment decisions.
Please note that this article does not constitute financial advice and is based on historical data and analyst forecasts. It is advisable to conduct thorough research and consult with financial professionals before making any investment decisions.