Returns On Capital Signal Difficult Times Ahead For Chiho Environmental Group (HKG:976)

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Chiho Environmental Group (HKG:976), so let's see why.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Chiho Environmental Group is:

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

0.015 = HK$83m ÷ (HK$8.7b - HK$3.1b) (Based on the trailing twelve months to December 2023).

Therefore, Chiho Environmental Group has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 7.2%.

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're interested in investigating Chiho Environmental Group's past further, check out this free graph covering Chiho Environmental Group's past earnings, revenue and cash flow.

The Trend Of ROCE

The trend of ROCE at Chiho Environmental Group is showing some signs of weakness. To be more specific, today's ROCE was 4.4% five years ago but has since fallen to 1.5%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 30% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. 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.

The Bottom Line On Chiho Environmental Group's ROCE

In summary, it's unfortunate that Chiho Environmental Group is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 41% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Chiho Environmental Group does come with some risks, and we've found 1 warning sign that you should be aware of.

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.

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