Seagate Technology Holdings (NASDAQ:STX) Will Be Hoping To Turn Its Returns On Capital Around

Seagate Technology PLC +0.78% Post

Seagate Technology PLC





+0.01% Post

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Seagate Technology Holdings (NASDAQ:STX), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Seagate Technology Holdings, this is the formula:

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

0.0065 = US$30m ÷ (US$7.1b - US$2.5b) (Based on the trailing twelve months to December 2023).

So, Seagate Technology Holdings has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 8.6%.

See our latest analysis for Seagate Technology Holdings

NasdaqGS:STX Return on Capital Employed March 29th 2024

Above you can see how the current ROCE for Seagate Technology Holdings 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 analyst report for Seagate Technology Holdings .

The Trend Of ROCE

We are a bit anxious about the trends of ROCE at Seagate Technology Holdings. The company used to generate 29% on its capital five years ago but it has since fallen noticeably. In addition to that, Seagate Technology Holdings is now employing 29% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

Our Take On Seagate Technology Holdings' ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Yet despite these poor fundamentals, the stock has gained a huge 134% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing to note, we've identified 3 warning signs with Seagate Technology Holdings and understanding them should be part of your investment process.

While Seagate Technology Holdings 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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