Some Investors May Be Worried About Grandshores Technology Group's (HKG:1647) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Grandshores Technology Group (HKG:1647), the trends above didn't look too great.

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. To calculate this metric for Grandshores Technology Group, this is the formula:

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

0.03 = S$1.8m ÷ (S$74m - S$14m) (Based on the trailing twelve months to March 2024).

Therefore, Grandshores Technology Group has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.7%.

See our latest analysis for Grandshores Technology 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'd like to look at how Grandshores Technology Group has performed in the past in other metrics, you can view this free graph of Grandshores Technology Group's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Grandshores Technology Group's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 9.0% 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. If these trends continue, we wouldn't expect Grandshores Technology Group to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Grandshores Technology Group is generating lower returns from the same amount of capital. Unsurprisingly then, the stock has dived 89% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 3 warning signs for Grandshores Technology Group that we think you should be aware of.

While Grandshores Technology Group 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.