Returns On Capital Signal Tricky Times Ahead For TravelCenters of America (NASDAQ:TA)

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating TravelCenters of America (NASDAQ:TA), we don't think it's current trends fit the mold of a multi-bagger.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for TravelCenters of America:

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

0.017 = US$50m ÷ (US$3.4b - US$445m) (Based on the trailing twelve months to December 2020).

Therefore, TravelCenters of America has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 13%.

See our latest analysis for TravelCenters of America

Above you can see how the current ROCE for TravelCenters of America 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 TravelCenters of America here for free.

What Can We Tell From TravelCenters of America's ROCE Trend?

When we looked at the ROCE trend at TravelCenters of America, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.8% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for TravelCenters of America have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 20% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for TravelCenters of America (2 are potentially serious) you should be aware of.

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. 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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