Some Investors May Be Worried About Thoughtworks Holding's (NASDAQ:TWKS) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Thoughtworks Holding (NASDAQ:TWKS), we weren't too hopeful.

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. The formula for this calculation on Thoughtworks Holding is:

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

0.02 = US$24m ÷ (US$1.3b - US$138m) (Based on the trailing twelve months to June 2023).

Therefore, Thoughtworks Holding has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the IT industry average of 14%.

View our latest analysis for Thoughtworks Holding

In the above chart we have measured Thoughtworks Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Thoughtworks Holding.

What Can We Tell From Thoughtworks Holding's ROCE Trend?

In terms of Thoughtworks Holding's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 8.5% that they were earning three 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 three years. If these trends continue, we wouldn't expect Thoughtworks Holding to turn into a multi-bagger.

What We Can Learn From Thoughtworks Holding's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last year have experienced a 61% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Thoughtworks Holding does come with some risks, and we've found 2 warning signs that 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. 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.