If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Tripadvisor (NASDAQ:TRIP), we've spotted some signs that it could be struggling, so let's investigate.
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. Analysts use this formula to calculate it for Tripadvisor:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = US$144m ÷ (US$2.7b - US$792m) (Based on the trailing twelve months to September 2024).
Therefore, Tripadvisor has an ROCE of 7.4%. Even though it's in line with the industry average of 6.8%, it's still a low return by itself.
Above you can see how the current ROCE for Tripadvisor 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 analyst report for Tripadvisor .
So How Is Tripadvisor's ROCE Trending?
There is reason to be cautious about Tripadvisor, given the returns are trending downwards. To be more specific, the ROCE was 9.6% 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. 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 five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tripadvisor becoming one if things continue as they have.
On a side note, Tripadvisor's current liabilities have increased over the last five years to 29% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 7.4%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
Our Take On Tripadvisor's ROCE
In summary, it's unfortunate that Tripadvisor is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 52% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
Tripadvisor could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for TRIP on our platform quite valuable.
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.
