Be Wary Of Ourpalm (SZSE:300315) And Its 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. 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Ourpalm (SZSE:300315), so let's see why.

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 Ourpalm, this is the formula:

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

0.013 = CN¥62m ÷ (CN¥5.3b - CN¥399m) (Based on the trailing twelve months to September 2024).

Therefore, Ourpalm has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 5.3%.

View our latest analysis for Ourpalm

Above you can see how the current ROCE for Ourpalm compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ourpalm for free.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Ourpalm. Unfortunately the returns on capital have diminished from the 5.9% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Ourpalm to turn into a multi-bagger.

Our Take On Ourpalm's ROCE

In summary, it's unfortunate that Ourpalm is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 10% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you're still interested in Ourpalm it's worth checking out our FREE intrinsic value approximation for 300315 to see if it's trading at an attractive price in other respects.

While Ourpalm 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.