Yahoo Finance The Returns On Capital At Hexcel (NYSE:HXL) Don't Inspire Confidence
If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Hexcel (NYSE:HXL) we aren't filled with optimism, but let's investigate further.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Hexcel, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = US$100m ÷ (US$2.9b - US$247m) (Based on the trailing twelve months to March 2022).
Thus, Hexcel has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 8.8%.
View our latest analysis for Hexcel
Above you can see how the current ROCE for Hexcel compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hexcel.
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at Hexcel. About five years ago, returns on capital were 15%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Hexcel to turn into a multi-bagger.
The Bottom Line On Hexcel's ROCE
In summary, it's unfortunate that Hexcel is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 13% 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.
One more thing to note, we've identified 1 warning sign with Hexcel and understanding this should be part of your investment process.
While Hexcel may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
