Investors Could Be Concerned With Playmates Toys' (HKG:869) Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Playmates Toys (HKG:869), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Playmates Toys, this is the formula:

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

0.0053 = HK$5.3m ÷ (HK$1.2b - HK$170m) (Based on the trailing twelve months to December 2022).

So, Playmates Toys has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 5.2%.

See our latest analysis for Playmates Toys

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Playmates Toys has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Playmates Toys' ROCE Trending?

We are a bit worried about the trend of returns on capital at Playmates Toys. About five years ago, returns on capital were 7.0%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. If these trends continue, we wouldn't expect Playmates Toys to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Playmates Toys is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 29% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a separate note, we've found 1 warning sign for Playmates Toys you'll probably want to know about.

While Playmates Toys 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.