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What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Yellow Pages (TSE:Y), we've spotted some signs that it could be struggling, so let's investigate.
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. Analysts use this formula to calculate it for Yellow Pages:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = CA$36m ÷ (CA$164m - CA$45m) (Based on the trailing twelve months to December 2024).
Thus, Yellow Pages has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 7.8% earned by companies in a similar industry.
Check out our latest analysis for Yellow Pages
Above you can see how the current ROCE for Yellow Pages compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Yellow Pages .
The Trend Of ROCE
We are a bit anxious about the trends of ROCE at Yellow Pages. Unfortunately, returns have declined substantially over the last five years to the 30% we see today. In addition to that, Yellow Pages is now employing 54% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.
What We Can Learn From Yellow Pages' ROCE
In summary, it's unfortunate that Yellow Pages is shrinking its capital base and also generating lower returns. Yet despite these concerning fundamentals, the stock has performed strongly with a 49% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.