Here's What We Make Of Playmates Holdings' (HKG:635) 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? 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Playmates Holdings (HKG:635) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on Playmates Holdings is:

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

0.019 = HK$134m ÷ (HK$7.8b - HK$743m) (Based on the trailing twelve months to June 2020).

Therefore, Playmates Holdings has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 7.7%.

Check out our latest analysis for Playmates Holdings

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

What Does the ROCE Trend For Playmates Holdings Tell Us?

There is reason to be cautious about Playmates Holdings, given the returns are trending downwards. To be more specific, the ROCE was 11% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Playmates Holdings to turn into a multi-bagger.

Our Take On Playmates Holdings' ROCE

In summary, it's unfortunate that Playmates Holdings is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 51% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Playmates Holdings does have some risks though, and we've spotted 1 warning sign for Playmates Holdings that you might be interested in.

While Playmates 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.

If you decide to trade Playmates Holdings, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.