These Return Metrics Don't Make Rastar Group (SZSE:300043) Look Too Strong

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. On that note, looking into Rastar Group (SZSE:300043), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Rastar Group is:

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

0.013 = CN¥36m ÷ (CN¥4.6b - CN¥1.9b) (Based on the trailing twelve months to September 2023).

Therefore, Rastar Group has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 6.1%.

See our latest analysis for Rastar Group

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Rastar Group.

What Can We Tell From Rastar Group's ROCE Trend?

We aren't inspired by the trend, given ROCE has reduced by 83% over the last five years and Rastar Group is applying -29% less capital in the business, even after the capital raising they conducted (prior to their latest reported figures).

On a side note, Rastar Group's current liabilities are still rather high at 41% 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.

The Key Takeaway

To see Rastar Group reducing the capital employed in the business in tandem with diminishing returns, is concerning. It should come as no surprise then that the stock has fallen 57% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Rastar Group does have some risks though, and we've spotted 2 warning signs for Rastar Group that you might be interested in.

While Rastar Group 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. 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.