The Returns On Capital At Playmates Toys (HKG:869) Don't Inspire Confidence

What underlying fundamental trends can indicate that a company might be in decline? 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 we looked into Playmates Toys (HKG:869), the trends above didn't look too great.

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 Playmates Toys:

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

0.042 = HK$41m ÷ (HK$1.2b - HK$234m) (Based on the trailing twelve months to June 2022).

So, Playmates Toys has an ROCE of 4.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.2%.

Check out our latest analysis for Playmates Toys

Historical performance is a great place to start when researching a stock so above you can see the gauge for Playmates Toys' ROCE against it's prior returns. 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?

In terms of Playmates Toys' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.6% 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. 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 the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 56% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Playmates Toys (of which 1 doesn't sit too well with us!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.