Investors Could Be Concerned With TI Fluid Systems' (LON:TIFS) Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into TI Fluid Systems (LON:TIFS), the trends above didn't look too great.

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. Analysts use this formula to calculate it for TI Fluid Systems:

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

0.055 = €132m ÷ (€3.1b - €657m) (Based on the trailing twelve months to December 2021).

So, TI Fluid Systems has an ROCE of 5.5%. In absolute terms, that's a low return but it's around the Auto Components industry average of 6.8%.

Check out our latest analysis for TI Fluid Systems

Above you can see how the current ROCE for TI Fluid Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for TI Fluid Systems.

What Can We Tell From TI Fluid Systems' ROCE Trend?

We are a bit worried about the trend of returns on capital at TI Fluid Systems. About five years ago, returns on capital were 9.7%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect TI Fluid Systems to turn into a multi-bagger.

Our Take On TI Fluid Systems' 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. Long term shareholders who've owned the stock over the last three years have experienced a 19% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

TI Fluid Systems does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

While TI Fluid Systems isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.