Trakm8 Holdings (LON:TRAK) Will Be Looking To Turn Around Its Returns
When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Trakm8 Holdings (LON:TRAK), we weren't too hopeful.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for Trakm8 Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = UK£908k ÷ (UK£39m - UK£11m) (Based on the trailing twelve months to March 2023).
So, Trakm8 Holdings has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 14%.
View our latest analysis for Trakm8 Holdings
Above you can see how the current ROCE for Trakm8 Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Trakm8 Holdings.
What Can We Tell From Trakm8 Holdings' ROCE Trend?
There is reason to be cautious about Trakm8 Holdings, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 7.3% that they were earning five years ago. 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 Trakm8 Holdings to turn into a multi-bagger.
The Bottom Line On Trakm8 Holdings' ROCE
In summary, it's unfortunate that Trakm8 Holdings is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 79% during the last five years. 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 1 warning sign for Trakm8 Holdings that we think you should be aware of.
While Trakm8 Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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