Returns On Capital At Ashley Services Group (ASX:ASH) Paint A Concerning Picture

Ashley Services Group (ASX:ASH) has been facing a concerning trend in its return on capital employed (ROCE) over the past five years. The company's ROCE has been declining, reaching a low of 3.6% in the trailing twelve months to December 2024, which is significantly below the industry average of 8.3%. This trend is not only underperforming the industry but also indicates that Ashland is becoming less efficient in generating returns from its capital investments.

The decline in Ashland's ROCE can be attributed to two main factors: a decrease in earnings before interest and tax (EBIT) and a reduction in capital employed. In the trailing twelve months to December 2024, Ashland's EBIT was US$172 million, which is lower than the US$200 million reported in the same period in 2020. This decline in EBIT has contributed to the decrease in ROCE, as EBIT is a key component in the ROCE calculation.

Additionally, total assets have also decreased over the same period. In the trailing twelve months to December 2024, Ashland's total assets were US$4.2 billion, compared to US$5.2 billion in 2020. This decrease in total assets has further contributed to the decline in ROCE, as the denominator in the ROCE calculation has shrunk.

The combination of lower EBIT and total assets has led to a decrease in Ashland's ROCE. This trend suggests that the company may be becoming less efficient in generating profits from its assets. Additionally, the decrease in total assets may indicate that the company is not reinvesting its earnings back into the business at the same rate as before, which could also contribute to the decline in ROCE.

In conclusion, the trends in Ashland's EBIT and total assets have contributed to the decline in its ROCE over time. The company's earnings have decreased, and it has also reduced its asset base, leading to a lower ROCE. This trend may indicate that Ashland is becoming less efficient in generating profits from its assets and may need to address these issues to improve its ROCE in the future.