Here's What's Concerning About Oriental Pearl GroupLtd's (SHSE:600637) Returns On Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Oriental Pearl GroupLtd (SHSE:600637) we aren't filled with optimism, but let's investigate further.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Oriental Pearl GroupLtd, this is the formula:

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

0.011 = CN¥403m ÷ (CN¥43b - CN¥6.9b) (Based on the trailing twelve months to September 2024).

Thus, Oriental Pearl GroupLtd has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Media industry average of 5.2%.

See our latest analysis for Oriental Pearl GroupLtd

Above you can see how the current ROCE for Oriental Pearl GroupLtd 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 Oriental Pearl GroupLtd .

The Trend Of ROCE

In terms of Oriental Pearl GroupLtd's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 3.0% 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Oriental Pearl GroupLtd becoming one if things continue as they have.

Our Take On Oriental Pearl GroupLtd'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. It should come as no surprise then that the stock has fallen 12% 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.

If you'd like to know more about Oriental Pearl GroupLtd, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

While Oriental Pearl GroupLtd 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.