When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, TrueBlue (NYSE:TBI) we aren't filled with optimism, but let's investigate further.
Return On Capital Employed (ROCE): What is it?
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 TrueBlue:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00085 = US$607k ÷ (US$981m - US$269m) (Based on the trailing twelve months to December 2020).
Thus, TrueBlue has an ROCE of 0.08%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 10%.
Above you can see how the current ROCE for TrueBlue compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering TrueBlue here for free.
So How Is TrueBlue's ROCE Trending?
The trend of returns that TrueBlue is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 0.08% we see today. On top of that, the business is utilizing 31% less capital within its operations. 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. If these underlying trends continue, we wouldn't be too optimistic going forward.
The Bottom Line On TrueBlue's ROCE
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Investors haven't taken kindly to these developments, since the stock has declined 11% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Like most companies, TrueBlue does come with some risks, and we've found 1 warning sign that you should be aware of.
While TrueBlue may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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