How Has Chemtrade Logistics Income Fund (TSE:CHE.UN) Allocated Its Capital?

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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Chemtrade Logistics Income Fund (TSE:CHE.UN), the trends above didn't look too great.

Understanding 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 Chemtrade Logistics Income Fund, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0028 = CA$6.5m ÷ (CA$2.6b - CA$322m) (Based on the trailing twelve months to September 2020).

Thus, Chemtrade Logistics Income Fund has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 7.1%.

See our latest analysis for Chemtrade Logistics Income Fund

Above you can see how the current ROCE for Chemtrade Logistics Income Fund 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 report on analyst forecasts for the company.

What Does the ROCE Trend For Chemtrade Logistics Income Fund Tell Us?

In terms of Chemtrade Logistics Income Fund's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 3.1% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect Chemtrade Logistics Income Fund to turn into a multi-bagger.

Our Take On Chemtrade Logistics Income Fund's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 50% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Chemtrade Logistics Income Fund (of which 1 can't be ignored!) that you should know about.

While Chemtrade Logistics Income Fund 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.

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