In This Article:
When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Maintel Holdings (LON:MAI), the trends above didn't look too great.
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. Analysts use this formula to calculate it for Maintel Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.066 = UK£2.4m ÷ (UK£83m - UK£47m) (Based on the trailing twelve months to December 2023).
So, Maintel Holdings has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.1%.
See our latest analysis for Maintel Holdings
In the above chart we have measured Maintel Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Maintel Holdings for free.
The Trend Of ROCE
The trend of returns that Maintel Holdings is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 6.6% we see today. On top of that, the business is utilizing 30% less capital within its operations. 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.
Another thing to note, Maintel Holdings has a high ratio of current liabilities to total assets of 57%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Maintel Holdings' ROCE
To see Maintel 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 47% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.