Turbon's (FRA:TUR) Returns On Capital Not Reflecting Well On The Business

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. In light of that, from a first glance at Turbon (FRA:TUR), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for Turbon, this is the formula:

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

0.034 = €911k ÷ (€48m - €21m) (Based on the trailing twelve months to December 2021).

Therefore, Turbon has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 7.8%.

View our latest analysis for Turbon

Historical performance is a great place to start when researching a stock so above you can see the gauge for Turbon's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Turbon, check out these free graphs here.

So How Is Turbon's ROCE Trending?

We are a bit anxious about the trends of ROCE at Turbon. Unfortunately, returns have declined substantially over the last five years to the 3.4% we see today. On top of that, the business is utilizing 51% less capital within its operations. 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.

On a side note, Turbon's current liabilities have increased over the last five years to 44% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 3.4%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Turbon's ROCE

To see Turbon reducing the capital employed in the business in tandem with diminishing returns, is concerning. This could explain why the stock has sunk a total of 72% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with Turbon (at least 1 which can't be ignored) , and understanding them would certainly be useful.

While Turbon 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.