If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount 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. And from a first read, things don't look too good at Clover( ASX:CLV ), so let's see why.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Clover is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = AU$9.9m ÷ (AU$87m - AU$13m) (Based on the trailing twelve months to July 2025) .
Therefore, Clover has an ROCE of 13%.In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 8.7% it's much better.
Check out our latest analysis for Clover
Above you can see how the current ROCE for Clover compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Clover .
What Can We Tell From Clover's ROCE Trend?
In terms of Clover's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 26%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Clover to turn into a multi-bagger.
Our Take On Clover's ROCE
In summary, it's unfortunate that Clover is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 42% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you'd like to know more about Clover, we've spotted 3 warning signs, and 1 of them is concerning.
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.
