What These Trends Mean At Terme Catez d.d (LJSE:TCRG)

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.017 = €1.8m ÷ (€159m - €53m) (Based on the trailing twelve months to December 2019).

Therefore, Terme Catez d.d has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 5.5%.

Check out 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'd like to look at how Terme Catez d.d has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We are a bit anxious about the trends of ROCE at Terme Catez d.d. To be more specific, today's ROCE was 2.2% five years ago but has since fallen to 1.7%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 31% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. 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.

The Bottom Line

In summary, it's unfortunate that Terme Catez d.d is shrinking its capital base and also generating lower returns. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Terme Catez d.d does have some risks, we noticed 5 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Terme Catez d.d isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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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