Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. This combination can tell you that not only is the company investing less, it’s earning less on what it does invest. So after we looked into SpaceandPeople (LON:SAL), the trends above didn’t look too great.
Understanding Return On Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for SpaceandPeople:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.0088 = UK£90k ÷ (UK£14m – UK£3.3m) (Based on the trailing twelve months to December 2019).
Therefore, SpaceandPeople has an ROCE of 0.9%. Ultimately, that’s a low return and it under-performs the Media industry average of 8.7%.
Check out our latest analysis for SpaceandPeople
Historical performance is a great place to start when researching a stock so above you can see the gauge for SpaceandPeople’s ROCE against it’s prior returns. If you’re interested in investigating SpaceandPeople’s past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From SpaceandPeople’s ROCE Trend?
We are a bit worried about the trend of returns on capital at SpaceandPeople. Unfortunately the returns on capital have diminished by 92% from what they were earning five years ago. On top of that, it’s worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it’s a mature business that hasn’t had much growth in the last five years. So because these trends aren’t typically conducive to creating a multi-bagger, we wouldn’t hold our breath on SpaceandPeople becoming one if things continue as they have.
On a related note, SpaceandPeople has decreased its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. What’s more, this can reduce some aspects of risk to the business because now the company’s suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it’s own money, you could argue this has made the business less efficient at generating ROCE.The Bottom Line
All in all, the lower returns from the same amount of capital employed aren’t exactly signs of a compounding machine. This could explain why the stock has sunk a total of 90% in the last five years. Unless these trends revert to a more positive trajectory, we would look elsewhere.
SpaceandPeople does have some risks though, and we’ve spotted 2 warning signs for SpaceandPeople that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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