When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Xerox Holdings (NASDAQ:XRX) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Xerox Holdings is:

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

0.028 = US$159m ÷ (US$8.4b - US$2.6b) (Based on the trailing twelve months to December 2024).

Therefore, Xerox Holdings has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 9.9%.

View our latest analysis for Xerox Holdings

Above you can see how the current ROCE for Xerox Holdings 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 Xerox Holdings .

What Does the ROCE Trend For Xerox Holdings Tell Us?

The trend of returns that Xerox Holdings is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 2.8% we see today. In addition to that, Xerox Holdings is now employing 51% less capital than it was five years ago. 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.

What We Can Learn From Xerox Holdings' ROCE

To see Xerox Holdings reducing the capital employed in the business in tandem with diminishing returns, is concerning. It should come as no surprise then that the stock has fallen 66% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Xerox Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

While Xerox Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.