Tootsie Roll Industries' (NYSE:TR) Returns On Capital Not Reflecting Well On The Business

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. Having said that, after a brief look, Tootsie Roll Industries (NYSE:TR) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on Tootsie Roll Industries is:

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

0.082 = US$75m ÷ (US$1.0b - US$95m) (Based on the trailing twelve months to September 2021).

So, Tootsie Roll Industries has an ROCE of 8.2%. On its own, that's a low figure but it's around the 9.4% average generated by the Food industry.

See our latest analysis for Tootsie Roll Industries

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 Tootsie Roll Industries' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

There is reason to be cautious about Tootsie Roll Industries, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 11% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tootsie Roll Industries becoming one if things continue as they have.

The Bottom Line On Tootsie Roll Industries' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Despite the concerning underlying trends, the stock has actually gained 11% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing to note, we've identified 1 warning sign with Tootsie Roll Industries and understanding it should be part of your investment process.

While Tootsie Roll Industries 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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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.