To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Points.com (TSE:PTS) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What is it?

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 Points.com, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.05 = US$2.8m ÷ (US$133m - US$77m) (Based on the trailing twelve months to September 2021).

Thus, Points.com has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Online Retail industry average of 12%.

View our latest analysis for Points.com

Above you can see how the current ROCE for Points.com compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Points.com Tell Us?

We are a bit worried about the trend of returns on capital at Points.com. Unfortunately the returns on capital have diminished from the 9.2% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. If these trends continue, we wouldn't expect Points.com to turn into a multi-bagger.

On a side note, Points.com's current liabilities are still rather high at 58% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, it's unfortunate that Points.com is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 107% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.