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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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Canlan Ice Sports (TSE:ICE) we aren't filled with optimism, but let's investigate further.
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. The formula for this calculation on Canlan Ice Sports is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = CA$1.6m ÷ (CA$119m - CA$23m) (Based on the trailing twelve months to June 2024).
So, Canlan Ice Sports has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 12%.
Check out our latest analysis for Canlan Ice Sports
Historical performance is a great place to start when researching a stock so above you can see the gauge for Canlan Ice Sports' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Canlan Ice Sports.
So How Is Canlan Ice Sports' ROCE Trending?
There is reason to be cautious about Canlan Ice Sports, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 6.3% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Canlan Ice Sports to turn into a multi-bagger.
Our Take On Canlan Ice Sports' ROCE
In summary, it's unfortunate that Canlan Ice Sports is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 11% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.