New Century Group Hong Kong (HKG:234) Will Be Hoping To Turn Its Returns On Capital Around

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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within New Century Group Hong Kong (HKG:234), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for New Century Group Hong Kong:

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

0.016 = HK$31m ÷ (HK$2.1b - HK$183m) (Based on the trailing twelve months to March 2023).

So, New Century Group Hong Kong has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 4.6%.

See our latest analysis for New Century Group Hong Kong

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

The Trend Of ROCE

In terms of New Century Group Hong Kong's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 7.9%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on New Century Group Hong Kong becoming one if things continue as they have.

The Bottom Line On New Century Group Hong Kong's ROCE

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. Investors haven't taken kindly to these developments, since the stock has declined 59% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

New Century Group Hong Kong does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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.