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When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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 indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Tantech Holdings (NASDAQ:TANH), the trends above didn't look too great.
What Is 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 Tantech Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = US$1.7m ÷ (US$142m - US$17m) (Based on the trailing twelve months to June 2024).
Thus, Tantech Holdings has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.4%.
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'd like to look at how Tantech Holdings has performed in the past in other metrics, you can view this free graph of Tantech Holdings' past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We are a bit worried about the trend of returns on capital at Tantech Holdings. About five years ago, returns on capital were 3.4%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Tantech Holdings to turn into a multi-bagger.
The Key Takeaway
In summary, it's unfortunate that Tantech Holdings is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 100% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
One final note, you should learn about the 4 warning signs we've spotted with Tantech Holdings (including 2 which don't sit too well with us) .