Trellidor Holdings (JSE:TRL) May Have Issues Allocating Its Capital

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Trellidor Holdings (JSE:TRL) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What Is It?

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 Trellidor Holdings:

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

0.07 = R22m ÷ (R431m - R115m) (Based on the trailing twelve months to December 2023).

Thus, Trellidor Holdings has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Building industry average of 17%.

See our latest analysis for Trellidor Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Trellidor Holdings' ROCE against it's prior returns. If you'd like to look at how Trellidor Holdings has performed in the past in other metrics, you can view this free graph of Trellidor Holdings' past earnings, revenue and cash flow.

So How Is Trellidor Holdings' ROCE Trending?

We are a bit worried about the trend of returns on capital at Trellidor Holdings. About five years ago, returns on capital were 28%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Trellidor Holdings to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Trellidor Holdings is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 48% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 4 warning signs for Trellidor Holdings that we think 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.