Chiho Environmental Group (HKG:976) Will Be Hoping To Turn Its Returns On Capital Around

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Chiho Environmental Group (HKG:976), the trends above didn't look too great.

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. Analysts use this formula to calculate it for Chiho Environmental Group:

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

0.031 = HK$179m ÷ (HK$8.8b - HK$3.1b) (Based on the trailing twelve months to June 2023).

Thus, Chiho Environmental Group has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.1%.

View our latest analysis for Chiho Environmental Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chiho Environmental Group's ROCE against it's prior returns. If you'd like to look at how Chiho Environmental Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Chiho Environmental Group's ROCE Trending?

We are a bit anxious about the trends of ROCE at Chiho Environmental Group. The company used to generate 6.6% on its capital five years ago but it has since fallen noticeably. In addition to that, Chiho Environmental Group is now employing 24% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

In Conclusion...

To see Chiho Environmental Group reducing the capital employed in the business in tandem with diminishing returns, is concerning. We expect this has contributed to the stock plummeting 85% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 3 warning signs facing Chiho Environmental Group that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.