Be Wary Of Tantech Holdings (NASDAQ:TANH) And Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Tantech Holdings (NASDAQ:TANH), it didn't seem to tick all of these boxes.

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 Tantech Holdings:

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

0.017 = US$1.7m ÷ (US$116m - US$17m) (Based on the trailing twelve months to December 2020).

Therefore, Tantech Holdings has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 9.8%.

Check out our latest analysis for Tantech Holdings

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 Tantech Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Tantech Holdings' ROCE Trending?

On the surface, the trend of ROCE at Tantech Holdings doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 1.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Tantech Holdings' ROCE

In summary, we're somewhat concerned by Tantech Holdings' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 70% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Tantech Holdings does have some risks, we noticed 4 warning signs (and 1 which is a bit concerning) we think you should know about.

While Tantech Holdings 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. 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.
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