When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Fletcher Building (NZSE:FBU), we weren't too hopeful.

Our free stock report includes 1 warning sign investors should be aware of before investing in Fletcher Building. Read for free now.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Fletcher Building is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.061 = NZ$403m ÷ (NZ$8.4b - NZ$1.8b) (Based on the trailing twelve months to December 2024).

Therefore, Fletcher Building has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Building industry average of 10%.

View our latest analysis for Fletcher Building

Above you can see how the current ROCE for Fletcher Building compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Fletcher Building .

What Does the ROCE Trend For Fletcher Building Tell Us?

We are a bit worried about the trend of returns on capital at Fletcher Building. To be more specific, the ROCE was 7.6% 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. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Fletcher Building to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Fletcher Building is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 18% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Like most companies, Fletcher Building does come with some risks, and we've found 1 warning sign that you should be aware of.

While Fletcher Building isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.