In This Article:
What underlying fundamental trends can indicate that a company might be in decline? 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. In light of that, from a first glance at Tate & Lyle (LON:TATE), we've spotted some signs that it could be struggling, so let's investigate.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Tate & Lyle is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = UK£196m ÷ (UK£2.7b - UK£526m) (Based on the trailing twelve months to September 2022).
Therefore, Tate & Lyle has an ROCE of 9.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.9%.
Check out our latest analysis for Tate & Lyle
In the above chart we have measured Tate & Lyle's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Tate & Lyle's ROCE Trending?
There is reason to be cautious about Tate & Lyle, given the returns are trending downwards. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tate & Lyle becoming one if things continue as they have.
Our Take On Tate & Lyle's ROCE
In summary, it's unfortunate that Tate & Lyle is generating lower returns from the same amount of capital. However the stock has delivered a 70% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.