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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining 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. In light of that, from a first glance at Maintel Holdings (LON:MAI), we've spotted some signs that it could be struggling, so let's investigate.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Maintel Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.088 = UK£2.4m ÷ (UK£92m - UK£64m) (Based on the trailing twelve months to December 2021).
So, Maintel Holdings has an ROCE of 8.8%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 11%.
Check out our latest analysis for Maintel Holdings
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Maintel Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We are a bit anxious about the trends of ROCE at Maintel Holdings. Unfortunately, returns have declined substantially over the last five years to the 8.8% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 55% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 70%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 8.8%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.