If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Rand Mining (ASX:RND) we aren't filled with optimism, but let's investigate further.

What Is Return On Capital Employed (ROCE)?

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 Rand Mining is:

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

0.098 = AU$9.8m ÷ (AU$104m - AU$3.4m) (Based on the trailing twelve months to June 2024).

So, Rand Mining has an ROCE of 9.8%. Even though it's in line with the industry average of 10%, it's still a low return by itself.

Check out our latest analysis for Rand Mining

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rand Mining's ROCE against it's prior returns. If you're interested in investigating Rand Mining's past further, check out this free graph covering Rand Mining's past earnings, revenue and cash flow.

What Can We Tell From Rand Mining's ROCE Trend?

There is reason to be cautious about Rand Mining, given the returns are trending downwards. To be more specific, the ROCE was 35% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Rand Mining becoming one if things continue as they have.

On a side note, Rand Mining has done well to pay down its current liabilities to 3.3% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, it's unfortunate that Rand Mining is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 13% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Rand Mining (including 1 which doesn't sit too well with us) .

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.

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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.