When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Nexa Resources (NYSE:NEXA), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Nexa Resources, this is the formula:

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

0.01 = US$38m ÷ (US$4.7b - US$1.0b) (Based on the trailing twelve months to June 2024).

So, Nexa Resources has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.4%.

Check out our latest analysis for Nexa Resources

Above you can see how the current ROCE for Nexa Resources 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 Nexa Resources .

How Are Returns Trending?

We are a bit anxious about the trends of ROCE at Nexa Resources. The company used to generate 4.0% on its capital five years ago but it has since fallen noticeably. In addition to that, Nexa Resources is now employing 28% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 22%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line

In summary, it's unfortunate that Nexa Resources is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 21% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.