Trakm8 Holdings' (LON:TRAK) Returns On Capital Tell Us There Is Reason To Feel Uneasy

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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 Trakm8 Holdings (LON:TRAK), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Trakm8 Holdings, this is the formula:

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

0.033 = UK£908k ÷ (UK£39m - UK£11m) (Based on the trailing twelve months to March 2023).

So, Trakm8 Holdings has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 16%.

View our latest analysis for Trakm8 Holdings

Above you can see how the current ROCE for Trakm8 Holdings 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 Trakm8 Holdings.

So How Is Trakm8 Holdings' ROCE Trending?

There is reason to be cautious about Trakm8 Holdings, given the returns are trending downwards. About five years ago, returns on capital were 7.3%, 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. 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 Trakm8 Holdings to turn into a multi-bagger.

The Bottom Line On Trakm8 Holdings' ROCE

In summary, it's unfortunate that Trakm8 Holdings is generating lower returns from the same amount of capital. Unsurprisingly then, the stock has dived 76% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Trakm8 Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While Trakm8 Holdings 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.