Returns On Capital Signal Difficult Times Ahead For InnoTec TSS (FRA:TSS)

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within InnoTec TSS (FRA:TSS), we weren't too hopeful.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on InnoTec TSS is:

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

0.083 = €8.3m ÷ (€113m - €12m) (Based on the trailing twelve months to December 2024).

Thus, InnoTec TSS has an ROCE of 8.3%. Ultimately, that's a low return and it under-performs the Building industry average of 11%.

See our latest analysis for InnoTec TSS

Historical performance is a great place to start when researching a stock so above you can see the gauge for InnoTec TSS' ROCE against it's prior returns. If you'd like to look at how InnoTec TSS has performed in the past in other metrics, you can view this free graph of InnoTec TSS' past earnings, revenue and cash flow.

So How Is InnoTec TSS' ROCE Trending?

In terms of InnoTec TSS' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on InnoTec TSS becoming one if things continue as they have.

Our Take On InnoTec TSS' ROCE

In summary, it's unfortunate that InnoTec TSS is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 14% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about InnoTec TSS, we've spotted 4 warning signs, and 1 of them is a bit concerning.

While InnoTec TSS 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.