Prince of Wales Country ClubI (SNSE:COUNTRY-A) Has Some Difficulty Using Its Capital Effectively

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Prince of Wales Country ClubI (SNSE:COUNTRY-A), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Prince of Wales Country ClubI, this is the formula:

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

0.003 = CL$37m ÷ (CL$13b - CL$276m) (Based on the trailing twelve months to December 2020).

So, Prince of Wales Country ClubI has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 5.0%.

View our latest analysis for Prince of Wales Country ClubI

Historical performance is a great place to start when researching a stock so above you can see the gauge for Prince of Wales Country ClubI's ROCE against it's prior returns. If you'd like to look at how Prince of Wales Country ClubI has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Prince of Wales Country ClubI Tell Us?

We are a bit worried about the trend of returns on capital at Prince of Wales Country ClubI. To be more specific, the ROCE was 3.8% five years ago, but since then it has dropped noticeably. 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 Prince of Wales Country ClubI to turn into a multi-bagger.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 29% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a separate note, we've found 3 warning signs for Prince of Wales Country ClubI you'll probably want to know about.

While Prince of Wales Country ClubI isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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