Some Investors May Be Worried About Goodbaby International Holdings' (HKG:1086) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Goodbaby International Holdings (HKG:1086), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Goodbaby International Holdings is:

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

0.0017 = HK$13m ÷ (HK$11b - HK$3.3b) (Based on the trailing twelve months to June 2023).

Thus, Goodbaby International Holdings has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Leisure industry average of 8.1%.

See our latest analysis for Goodbaby International Holdings

Above you can see how the current ROCE for Goodbaby International Holdings 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 report on analyst forecasts for the company.

What Does the ROCE Trend For Goodbaby International Holdings Tell Us?

We are a bit worried about the trend of returns on capital at Goodbaby International Holdings. Unfortunately the returns on capital have diminished from the 4.7% 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Goodbaby International Holdings becoming one if things continue as they have.

Our Take On Goodbaby International Holdings' ROCE

In summary, it's unfortunate that Goodbaby International Holdings is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 85% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 1 warning sign for Goodbaby International Holdings that we think you should be aware of.

While Goodbaby International Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.