TVhi Holdings' (TSE:9409) Returns On Capital Not Reflecting Well On The Business

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into TVhi Holdings (TSE:9409), 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 TVhi Holdings:

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

0.024 = JP¥11b ÷ (JP¥509b - JP¥64b) (Based on the trailing twelve months to December 2023).

So, TVhi Holdings has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Media industry average of 10%.

View our latest analysis for TVhi Holdings

In the above chart we have measured TVhi Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for TVhi Holdings .

What Can We Tell From TVhi Holdings' ROCE Trend?

We are a bit worried about the trend of returns on capital at TVhi Holdings. Unfortunately the returns on capital have diminished from the 4.3% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on TVhi Holdings becoming one if things continue as they have.

What We Can Learn From TVhi Holdings' ROCE

In summary, it's unfortunate that TVhi Holdings is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 16% in the last five 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, TVhi Holdings does come with some risks, and we've found 2 warning signs 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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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.