Eternal Asia Supply Chain Management (SZSE:002183) Has Some Difficulty Using Its Capital Effectively

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. On that note, looking into Eternal Asia Supply Chain Management (SZSE:002183), we weren't too upbeat about how things were going.

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 Eternal Asia Supply Chain Management, this is the formula:

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

0.073 = CN¥983m ÷ (CN¥52b - CN¥38b) (Based on the trailing twelve months to September 2024).

So, Eternal Asia Supply Chain Management has an ROCE of 7.3%. On its own that's a low return, but compared to the average of 5.3% generated by the Commercial Services industry, it's much better.

View our latest analysis for Eternal Asia Supply Chain Management

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

What Can We Tell From Eternal Asia Supply Chain Management's ROCE Trend?

In terms of Eternal Asia Supply Chain Management's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 12% that they were earning five years ago. 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 Eternal Asia Supply Chain Management becoming one if things continue as they have.

On a side note, Eternal Asia Supply Chain Management's current liabilities are still rather high at 74% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Eternal Asia Supply Chain Management's ROCE

In summary, it's unfortunate that Eternal Asia Supply Chain Management is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 27% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 3 warning signs with Eternal Asia Supply Chain Management (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

While Eternal Asia Supply Chain Management 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.