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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Tantech Holdings (NASDAQ:TANH) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Tantech Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0037 = US$450k ÷ (US$136m - US$16m) (Based on the trailing twelve months to June 2022).
Thus, Tantech Holdings has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 12%.
View our latest analysis for Tantech Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Tantech Holdings' ROCE against it's prior returns. If you're interested in investigating Tantech Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
When we looked at the ROCE trend at Tantech Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.4% from 4.3% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Tantech Holdings' ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Tantech Holdings. But since the stock has dived 100% in the last five years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.
Like most companies, Tantech Holdings does come with some risks, and we've found 4 warning signs that you should be aware of.
While Tantech 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.