TreeHouse Foods (NYSE:THS) Could Be At Risk Of Shrinking As A Company

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at TreeHouse Foods (NYSE:THS), so let's see why.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for TreeHouse Foods:

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

0.02 = US$84m ÷ (US$5.3b - US$1.2b) (Based on the trailing twelve months to June 2022).

So, TreeHouse Foods has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Food industry average of 10.0%.

View our latest analysis for TreeHouse Foods

In the above chart we have measured TreeHouse Foods' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

The trend of returns that TreeHouse Foods is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 2.0% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 29% 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. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, TreeHouse Foods' current liabilities have increased over the last five years to 22% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line

In summary, it's unfortunate that TreeHouse Foods is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 35% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

While TreeHouse Foods doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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.