To avoid investing in a business that’s in decline, there’s a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that’s often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it’s earning less on what it does invest. And from a first read, things don’t look too good at Wabash National (NYSE:WNC), so let’s see why.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Wabash National:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = US$93m ÷ (US$1.3b – US$397m) (Based on the trailing twelve months to September 2022).
Therefore, Wabash National has an ROCE of 11{8ba6a1175a1c659bbdaa9a04b06717769bcea92c0fdf198d429188ebbca09471}. That’s a pretty standard return and it’s in line with the industry average of 11{8ba6a1175a1c659bbdaa9a04b06717769bcea92c0fdf198d429188ebbca09471}.
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Above you can see how the current ROCE for Wabash National 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 Wabash National.
What Does the ROCE Trend For Wabash National Tell Us?
The trend of returns that Wabash National is generating are raising some concerns. The company used to generate 13{8ba6a1175a1c659bbdaa9a04b06717769bcea92c0fdf198d429188ebbca09471} on its capital five years ago but it has since fallen noticeably. In addition to that, Wabash National is now employing 20{8ba6a1175a1c659bbdaa9a04b06717769bcea92c0fdf198d429188ebbca09471} less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn’t be too optimistic going forward.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 31{8ba6a1175a1c659bbdaa9a04b06717769bcea92c0fdf198d429188ebbca09471}, which has impacted the ROCE. If current liabilities hadn’t increased as much as they did, the ROCE could actually be even lower. While the ratio isn’t currently too high, it’s worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
Our Take On Wabash National’s ROCE
To see Wabash National reducing the capital employed in the business in tandem with diminishing returns, is concerning. Despite the concerning underlying trends, the stock has actually gained 29{8ba6a1175a1c659bbdaa9a04b06717769bcea92c0fdf198d429188ebbca09471} over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren’t huge fans of the current trends and so with that we think you might find better investments elsewhere.
One more thing, we’ve spotted 2 warning signs facing Wabash National that you might find interesting.
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.
What are the risks and opportunities for Wabash National?
Wabash National Corporation designs, manufactures, and distributes engineered solutions for the transportation, logistics, and distribution industries primarily in the United States.
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Rewards
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Trading at 50.8{8ba6a1175a1c659bbdaa9a04b06717769bcea92c0fdf198d429188ebbca09471} below our estimate of its fair value
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Earnings are forecast to grow 14.22{8ba6a1175a1c659bbdaa9a04b06717769bcea92c0fdf198d429188ebbca09471} per year
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Earnings grew by 42.3{8ba6a1175a1c659bbdaa9a04b06717769bcea92c0fdf198d429188ebbca09471} over the past year
Risks
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Significant insider selling over the past 3 months
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Has a high level of debt
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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.
