Here's What's Concerning About Cabbeen Fashion's (HKG:2030) 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? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Cabbeen Fashion (HKG:2030), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

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 Cabbeen Fashion:

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

0.056 = CN¥76m ÷ (CN¥2.2b - CN¥877m) (Based on the trailing twelve months to December 2023).

So, Cabbeen Fashion has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 10%.

Check out our latest analysis for Cabbeen Fashion

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

What Can We Tell From Cabbeen Fashion's ROCE Trend?

There is reason to be cautious about Cabbeen Fashion, given the returns are trending downwards. To be more specific, the ROCE was 21% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Cabbeen Fashion to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 58% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Cabbeen Fashion we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Cabbeen Fashion 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.