Terme Catez d.d (LJSE:TCRG) Could Be Struggling To Allocate Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Terme Catez d.d (LJSE:TCRG), we weren't too upbeat about how things were going.

Understanding 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 Terme Catez d.d, this is the formula:

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

0.042 = €5.2m ÷ (€155m - €31m) (Based on the trailing twelve months to June 2022).

Therefore, Terme Catez d.d has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 6.2%.

View our latest analysis for Terme Catez d.d

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

What Does the ROCE Trend For Terme Catez d.d Tell Us?

There is reason to be cautious about Terme Catez d.d, given the returns are trending downwards. About five years ago, returns on capital were 6.5%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Terme Catez d.d to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Terme Catez d.d is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 12% 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.

Terme Catez d.d does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.