Yahoo Finance The Returns On Capital At Tantech Holdings (NASDAQ:TANH) Don't Inspire Confidence
When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Tantech Holdings (NASDAQ:TANH), 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 Tantech Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = US$3.3m ÷ (US$138m - US$15m) (Based on the trailing twelve months to June 2023).
So, Tantech Holdings has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 10%.
View our latest analysis for Tantech Holdings
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Tantech Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
There is reason to be cautious about Tantech Holdings, given the returns are trending downwards. About five years ago, returns on capital were 4.9%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tantech Holdings becoming one if things continue as they have.
The Key Takeaway
In summary, it's unfortunate that Tantech Holdings is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 100% during the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
Tantech Holdings does have some risks though, and we've spotted 4 warning signs for Tantech Holdings that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
