What underlying fundamental trends can indicate that a company might be 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Tantech Holdings (NASDAQ:TANH), so let's see why.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

0.013 = US$1.7m ÷ (US$142m - US$17m) (Based on the trailing twelve months to June 2024).

Therefore, Tantech Holdings has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.8%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tantech Holdings' ROCE against it's prior returns.

What Does the ROCE Trend For Tantech Holdings Tell Us?

We are a bit worried about the trend of returns on capital at Tantech Holdings. About five years ago, returns on capital were 3.4%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Bottom Line On Tantech Holdings' ROCE

In summary, it's unfortunate that Tantech Holdings is generating lower returns from the same amount of capital. Unsurprisingly then, the stock has dived 100% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 4 warning signs with Tantech Holdings (at least 2 which are concerning) , and understanding these would certainly be useful.

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.