Capital Allocation Trends At Adient (NYSE:ADNT) Aren’t Ideal

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. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Adient (NYSE:ADNT), we weren’t too upbeat about how things were going.

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. Analysts use this formula to calculate it for Adient:

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

0.035 = US$207m ÷ (US$9.3b – US$3.4b) (Based on the trailing twelve months to September 2022).

Therefore, Adient has an ROCE of 3.5%. Ultimately, that’s a low return and it under-performs the Auto Components industry average of 11%.

View our latest analysis for Adient

roce

roce

Above you can see how the current ROCE for Adient 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 Adient here for free.

So How Is Adient’s ROCE Trending?

The trend of returns that Adient is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 3.5% we see today. On top of that, the business is utilizing 28% less capital within its operations. 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. Typically businesses that exhibit these characteristics aren’t the ones that tend to multiply over the long term, because statistically speaking, they’ve already gone through the growth phase of their life cycle.

Our Take On Adient’s ROCE

To see Adient reducing the capital employed in the business in tandem with diminishing returns, is concerning. Long term shareholders who’ve owned the stock over the last five years have experienced a 50% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we’ve spotted 1 warning sign facing Adient 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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