If we want to avoid a business that is in decline, what trends can warn us in advance? A business that is potentially in decline often shows two trends, one return on the capital employed (ROCE), which is declining, and a base of capital employed, which is also decreasing. Ultimately, this means that the company is earning less per dollar invested and, in addition, its capital employed base is shrinking. So, after looking at Flowtech Fluid Technology (LON:FLO), the above trends did not look too good.
Understanding Return on Capital Employed (ROCE)
Just to clarify in case you’re not sure, ROCE is a metric used to evaluate how much profit before tax (as a percentage) a company generates with the capital invested in its business. Analysts use this formula to calculate it for Flowtech Fluidpower:
Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.05 = £4.6m ÷ (£117m – £24m) (Based on the last twelve months to December 2023).
Therefore, Flowtech Fluidpower has a ROCE of 5.0%. In absolute terms, this is a low return and is also below the industry average of 14% for retail distribution.
Check out our latest analysis for Flowtech Fluidpower
Above you can see how the current ROCE for Flowtech Fluidpower compares to previous returns on capital, but there is only so much that can be said from the past. If you want to know what analysts are forecasting for the future, you should check out our free analyst report for Flowtech Fluidpower.
The trend of ROCE
There is reason to be cautious with Flowtech Fluidpower as returns are trending downward. More specifically, ROCE was 10% five years ago but has fallen significantly since then. At the same time, capital employed in the company has remained roughly the same over time. This combination may indicate a mature company that still has areas to deploy capital, but the returns generated may not be as high due to new competition or lower margins. If these trends continue, we do not expect Flowtech Fluidpower to become a multibagger.
Finally…
In summary, it’s unfortunate that Flowtech Fluidpower is generating less return on the same capital. And the stock has remained flat over the past five years, so investors don’t seem particularly impressed either. Unless these metrics move in a more positive direction, we’d look elsewhere.
However, Flowtech Fluidpower brings with it some risks, 3 warning signals in our investment analysis, and 1 of them makes us a little uncomfortable…
Although Flowtech Fluidpower does not have the highest return on investment, check out free List of companies with solid balance sheets and high returns on equity.
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