Capital returns signal tough times ahead for Gentherm (NASDAQ:THRM)
When we’re researching a business, it’s sometimes hard to find the warning signs, but certain financial metrics can help spot problems early. When we see a decline come back on capital employed (ROCE) in connection with a decrease base capital employed, this is often how a mature company shows signs of aging. This combination can tell you that the company is not only investing less, but earning less on what it invests. And from a first reading, things don’t look very good to Gentherm (NASDAQ:THRM), so let’s see why.
Understanding return on capital employed (ROCE)
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. The formula for this calculation on Gentherm is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.093 = $66 million ÷ ($947 million – $239 million) (Based on the last twelve months to June 2022).
Thereby, Gentherm has an ROI of 9.3%. In absolute terms, this is a low return, but it is around the automotive components industry average of 10.0%.
See our latest analysis for Gentherm
Above, you can see how Gentherm’s current ROCE compares to its past returns on capital, but there’s little you can say about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
So, what is Gentherm’s ROCE trend?
There is reason to be cautious about Gentherm, given that yields are on the downside. Unfortunately, capital returns have declined from the 16% they were earning five years ago. And on the capital employed front, the company is using roughly the same amount of capital as it was back then. This combination may be a sign of a mature business that still has areas to deploy capital, but the returns received are not as high due potentially to new competition or lower margins. So because these trends are generally not conducive to creating a multi-bagger, we wouldn’t hold our breath on Gentherm becoming one if things continue as they have.
Overall, lower returns from the same amount of capital employed are not exactly signs of a compounding machine. The market must be rosy on the stock’s future because while the underlying trends aren’t too encouraging, the stock is up 117%. Either way, the current underlying trends don’t bode well for long-term performance, so unless they reverse, we’d start looking elsewhere.
Finally we found 2 warning signs for Gentherm which we think you should be aware of.
Although Gentherm doesn’t get the highest yield, check out this free list of companies that achieve high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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