Capital Allocation Trends At Asia Grocery Distribution (HKG:8413) Aren't Ideal

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Asia Grocery Distribution (HKG:8413), we weren't too hopeful.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Asia Grocery Distribution is:

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

0.0047 = HK$543k ÷ (HK$138m - HK$23m) (Based on the trailing twelve months to December 2022).

Thus, Asia Grocery Distribution has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 10.0%.

See our latest analysis for Asia Grocery Distribution

Historical performance is a great place to start when researching a stock so above you can see the gauge for Asia Grocery Distribution's ROCE against it's prior returns. If you're interested in investigating Asia Grocery Distribution's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Asia Grocery Distribution, given the returns are trending downwards. About five years ago, returns on capital were 10%, however they're now substantially lower than that as we saw above. 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 Asia Grocery Distribution to turn into a multi-bagger.

The Bottom Line On Asia Grocery Distribution's ROCE

In summary, it's unfortunate that Asia Grocery Distribution is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 88% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing to note, we've identified 3 warning signs with Asia Grocery Distribution and understanding them should be part of your investment process.

While Asia Grocery Distribution 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.