What underlying fundamental trends can indicate that a company might be in decline? 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. So after glancing at the trends within New Century Group Hong Kong (HKG:234), 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 New Century Group Hong Kong is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0019 = HK$3.7m ÷ (HK$2.0b - HK$104m) (Based on the trailing twelve months to September 2021).
So, New Century Group Hong Kong has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 2.7%.
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 want to delve into the historical earnings, revenue and cash flow of New Century Group Hong Kong, check out these free graphs here.
What Can We Tell From New Century Group Hong Kong's ROCE Trend?
We are a bit worried about the trend of returns on capital at New Century Group Hong Kong. Unfortunately the returns on capital have diminished from the 6.9% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. 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
In summary, it's unfortunate that New Century Group Hong Kong is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 57% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
One final note, you should learn about the 4 warning signs we've spotted with New Century Group Hong Kong (including 1 which can't be ignored) .
While New Century Group Hong Kong 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.
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.