Returns On Capital At OT Logistics (WSE:OTS) Paint A Concerning Picture

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into OT Logistics (WSE:OTS), the trends above didn't look too great.

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 OT Logistics:

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

0.00021 = zł84k ÷ (zł827m - zł436m) (Based on the trailing twelve months to March 2021).

So, OT Logistics has an ROCE of 0.02%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 5.0%.

Check out our latest analysis for OT Logistics

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 OT Logistics' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is OT Logistics' ROCE Trending?

The trend of returns that OT Logistics is generating are raising some concerns. To be more specific, today's ROCE was 3.6% five years ago but has since fallen to 0.02%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 20% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 53%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On OT Logistics' ROCE

In summary, it's unfortunate that OT Logistics is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 67% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 5 warning signs with OT Logistics (at least 3 which are significant) , and understanding these would certainly be useful.

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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