Is Hipermarc (SNSE:HIPERMARC) Using Capital Effectively?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Hipermarc (SNSE:HIPERMARC), we've spotted some signs that it could be struggling, so let's investigate.

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 Hipermarc, this is the formula:

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

0.0083 = CL$749m ÷ (CL$95b - CL$5.0b) (Based on the trailing twelve months to September 2020).

So, Hipermarc has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 9.9%.

See our latest analysis for Hipermarc

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'd like to look at how Hipermarc has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Hipermarc's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 1.3%, 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. 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 Hipermarc to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Hipermarc is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 26% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a separate note, we've found 2 warning signs for Hipermarc you'll probably want to know about.

While Hipermarc may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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