Some Investors May Be Worried About Tandy Leather Factory's (NASDAQ:TLF) Returns On Capital
Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Tandy Leather Factory (NASDAQ:TLF), we've spotted some signs that it could be struggling, so let's investigate.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Tandy Leather Factory is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = US$2.0m ÷ (US$70m - US$11m) (Based on the trailing twelve months to September 2022).
Therefore, Tandy Leather Factory has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 17%.
View our latest analysis for Tandy Leather Factory
Historical performance is a great place to start when researching a stock so above you can see the gauge for Tandy Leather Factory's ROCE against it's prior returns. If you'd like to look at how Tandy Leather Factory has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Tandy Leather Factory's ROCE Trending?
There is reason to be cautious about Tandy Leather Factory, given the returns are trending downwards. To be more specific, the ROCE was 11% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Tandy Leather Factory to turn into a multi-bagger.
In Conclusion...
In summary, it's unfortunate that Tandy Leather Factory is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 39% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
One final note, you should learn about the 2 warning signs we've spotted with Tandy Leather Factory (including 1 which is a bit concerning) .
While Tandy Leather Factory 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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