Returns On Capital Signal Tricky Times Ahead For Technical Publications Service (BIT:TPS)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Technical Publications Service (BIT:TPS), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Technical Publications Service:

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

0.086 = €2.5m ÷ (€35m - €6.2m) (Based on the trailing twelve months to December 2020).

Therefore, Technical Publications Service has an ROCE of 8.6%. On its own, that's a low figure but it's around the 9.7% average generated by the Aerospace & Defense industry.

View our latest analysis for Technical Publications Service

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 Technical Publications Service's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Technical Publications Service's ROCE Trend?

When we looked at the ROCE trend at Technical Publications Service, we didn't gain much confidence. To be more specific, ROCE has fallen from 36% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Technical Publications Service has done well to pay down its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Technical Publications Service's ROCE

In summary, we're somewhat concerned by Technical Publications Service's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 2.5% return to shareholders who held over the last three years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

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

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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