Staffline Group (LON:STAF) Has Some Difficulty Using Its Capital Effectively
When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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. And from a first read, things don't look too good at Staffline Group (LON:STAF), so let's see why.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Staffline Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = UK£3.6m ÷ (UK£217m - UK£144m) (Based on the trailing twelve months to June 2023).
Therefore, Staffline Group has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 15%.
View our latest analysis for Staffline Group
In the above chart we have measured Staffline Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Staffline Group here for free.
How Are Returns Trending?
The trend of returns that Staffline Group is generating are raising some concerns. The company used to generate 22% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 48% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 66%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
In Conclusion...
In summary, it's unfortunate that Staffline Group is shrinking its capital base and also generating lower returns. This could explain why the stock has sunk a total of 98% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing, we've spotted 2 warning signs facing Staffline Group that you might find interesting.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
