TotalEnergies EP Gabon Société Anonyme (EPA:EC) Could Be At Risk Of Shrinking As A Company

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within TotalEnergies EP Gabon Société Anonyme (EPA:EC), we weren't too hopeful.

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

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 TotalEnergies EP Gabon Société Anonyme:

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

0.039 = US$109m ÷ (US$3.0b - US$194m) (Based on the trailing twelve months to December 2023).

Thus, TotalEnergies EP Gabon Société Anonyme has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 16%.

See our latest analysis for TotalEnergies EP Gabon Société Anonyme

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating TotalEnergies EP Gabon Société Anonyme's past further, check out this free graph covering TotalEnergies EP Gabon Société Anonyme's past earnings, revenue and cash flow.

What Does the ROCE Trend For TotalEnergies EP Gabon Société Anonyme Tell Us?

The trend of returns that TotalEnergies EP Gabon Société Anonyme is generating are raising some concerns. To be more specific, today's ROCE was 5.3% five years ago but has since fallen to 3.9%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 31% over that same period. 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.

The Key Takeaway

To see TotalEnergies EP Gabon Société Anonyme reducing the capital employed in the business in tandem with diminishing returns, is concerning. Yet despite these poor fundamentals, the stock has gained a huge 282% 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.

One more thing, we've spotted 3 warning signs facing TotalEnergies EP Gabon Société Anonyme that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.