If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, TriNet Group (NYSE:TNET) we aren't filled with optimism, but let's investigate further.
What Is 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. The formula for this calculation on TriNet Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$237m ÷ (US$3.8b - US$2.6b) (Based on the trailing twelve months to March 2025).
Therefore, TriNet Group has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 14%.
See our latest analysis for TriNet Group
In the above chart we have measured TriNet Group'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 TriNet Group for free.
The Trend Of ROCE
There is reason to be cautious about TriNet Group, given the returns are trending downwards. About five years ago, returns on capital were 26%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on TriNet Group becoming one if things continue as they have.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 70%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 21%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.
The Bottom Line
In summary, it's unfortunate that TriNet Group is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 54% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
TriNet Group does have some risks though, and we've spotted 2 warning signs for TriNet Group that you might be interested in.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.