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If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Flowtech Fluidpower (LON:FLO), the trends above didn't look too great.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Flowtech Fluidpower:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = UK£4.6m ÷ (UK£117m - UK£24m) (Based on the trailing twelve months to December 2023).
Therefore, Flowtech Fluidpower has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 14%.
See our latest analysis for Flowtech Fluidpower
Above you can see how the current ROCE for Flowtech Fluidpower 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 Flowtech Fluidpower .
The Trend Of ROCE
There is reason to be cautious about Flowtech Fluidpower, given the returns are trending downwards. To be more specific, the ROCE was 10% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Flowtech Fluidpower to turn into a multi-bagger.
In Conclusion...
In summary, it's unfortunate that Flowtech Fluidpower is generating lower returns from the same amount of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Flowtech Fluidpower does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...