If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Snail (NASDAQ:SNAL), so let's see why.

Understanding 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. Analysts use this formula to calculate it for Snail:

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

0.20 = US$4.5m ÷ (US$67m - US$44m) (Based on the trailing twelve months to September 2024).

So, Snail has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Entertainment industry average of 9.9%.

View our latest analysis for Snail

Above you can see how the current ROCE for Snail 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 Snail .

How Are Returns Trending?

In terms of Snail's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last four years to the 20% we see today. On top of that, the business is utilizing 59% 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. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Snail's current liabilities have increased over the last four years to 65% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 20%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Snail's ROCE

In summary, it's unfortunate that Snail is shrinking its capital base and also generating lower returns. Yet despite these poor fundamentals, the stock has gained a huge 164% over the last year, 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 final note, you should learn about the 2 warning signs we've spotted with Snail (including 1 which doesn't sit too well with us) .

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.