Techfirm Holdings (TSE:3625) Has Some Difficulty Using Its Capital Effectively

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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Techfirm Holdings (TSE:3625), we weren't too upbeat about how things were going.

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. Analysts use this formula to calculate it for Techfirm Holdings:

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

0.084 = JP¥188m ÷ (JP¥4.0b - JP¥1.8b) (Based on the trailing twelve months to March 2024).

So, Techfirm Holdings has an ROCE of 8.4%. Ultimately, that's a low return and it under-performs the IT industry average of 16%.

View our latest analysis for Techfirm Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Techfirm Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Techfirm Holdings.

So How Is Techfirm Holdings' ROCE Trending?

In terms of Techfirm Holdings' historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 16% five years ago but has since fallen to 8.4%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 52% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 44%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 8.4%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Key Takeaway

In summary, it's unfortunate that Techfirm Holdings is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 62% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Techfirm Holdings does have some risks though, and we've spotted 2 warning signs for Techfirm Holdings that you might be interested in.

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.

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