Capital Allocation Trends At Ajisen (China) Holdings (HKG:538) Aren't Ideal

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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 Ajisen (China) Holdings (HKG:538), the trends above didn't look too great.

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. To calculate this metric for Ajisen (China) Holdings, this is the formula:

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

0.036 = CN¥125m ÷ (CN¥4.0b - CN¥467m) (Based on the trailing twelve months to December 2023).

Therefore, Ajisen (China) Holdings has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 5.9%.

Check out our latest analysis for Ajisen (China) Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ajisen (China) Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Ajisen (China) Holdings.

So How Is Ajisen (China) Holdings' ROCE Trending?

In terms of Ajisen (China) Holdings' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.4%, 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. 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 Ajisen (China) Holdings becoming one if things continue as they have.

The Bottom Line On Ajisen (China) Holdings' 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 43% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Ajisen (China) Holdings (of which 1 makes us a bit uncomfortable!) that you should know about.

While Ajisen (China) Holdings 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.

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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.