To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Thoughtworks Holding (NASDAQ:TWKS) we aren't filled with optimism, but let's investigate further.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Thoughtworks Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = US$40m ÷ (US$1.3b - US$148m) (Based on the trailing twelve months to September 2023).
Thus, Thoughtworks Holding has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the IT industry average of 12%.
View our latest analysis for Thoughtworks Holding
In the above chart we have measured Thoughtworks Holding'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 Thoughtworks Holding here for free.
So How Is Thoughtworks Holding's ROCE Trending?
In terms of Thoughtworks Holding's historical ROCE movements, the trend doesn't inspire confidence. About three years ago, returns on capital were 8.7%, 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last three years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Thoughtworks Holding becoming one if things continue as they have.
In Conclusion...
In summary, it's unfortunate that Thoughtworks Holding 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 year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
While Thoughtworks Holding doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
While Thoughtworks Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.