To avoid investing in a business that’s in decline, there’s a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don’t look too good at Corning (NYSE:GLW), so let’s see why.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Corning is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.056 = US$1.3b ÷ (US$28b – US$4.3b) (Based on the trailing twelve months to September 2023).
Therefore, Corning has an ROCE of 5.6%. In absolute terms, that’s a low return and it also under-performs the Electronic industry average of 12%.
Check out our latest analysis for Corning
Above you can see how the current ROCE for Corning compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Corning here for free.
What Does the ROCE Trend For Corning Tell Us?
We are a bit worried about the trend of returns on capital at Corning. To be more specific, the ROCE was 7.0% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn’t expect Corning to turn into a multi-bagger.
The Key Takeaway
In summary, it’s unfortunate that Corning is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 21% in the last five years. Regardless, we don’t like the trends as they are and if they persist, we think you might find better investments elsewhere.
If you want to know some of the risks facing Corning we’ve found 4 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
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.
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