These Return Metrics Don't Make China Outfitters Holdings (HKG:1146) Look Too Strong

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within China Outfitters Holdings (HKG:1146), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for China Outfitters Holdings:

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

0.012 = CN¥21m ÷ (CN¥2.0b - CN¥295m) (Based on the trailing twelve months to December 2020).

Therefore, China Outfitters Holdings has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Luxury industry average of 6.9%.

Check out our latest analysis for China Outfitters Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Outfitters Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of China Outfitters Holdings, check out these free graphs here.

So How Is China Outfitters Holdings' ROCE Trending?

In terms of China Outfitters Holdings' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 8.1% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 China Outfitters Holdings becoming one if things continue as they have.

On a related note, China Outfitters Holdings has decreased its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On China Outfitters Holdings' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 56% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing China Outfitters Holdings we've found 3 warning signs (1 can't be ignored!) that you should be aware of before investing here.

While China Outfitters Holdings 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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