Here's What's Concerning About Bros Eastern.Ltd's (SHSE:601339) Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Bros Eastern.Ltd (SHSE:601339), so let's see why.

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. The formula for this calculation on Bros Eastern.Ltd is:

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

0.016 = CN¥177m ÷ (CN¥15b - CN¥3.7b) (Based on the trailing twelve months to September 2024).

So, Bros Eastern.Ltd has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 6.5%.

Check out our latest analysis for Bros Eastern.Ltd

Above you can see how the current ROCE for Bros Eastern.Ltd 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 analyst report for Bros Eastern.Ltd .

How Are Returns Trending?

There is reason to be cautious about Bros Eastern.Ltd, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 4.1% that they were earning five years ago. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Bros Eastern.Ltd becoming one if things continue as they have.

The Bottom Line On Bros Eastern.Ltd's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 90% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing to note, we've identified 3 warning signs with Bros Eastern.Ltd and understanding these should be part of your investment process.

While Bros Eastern.Ltd 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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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.