Here's What's Concerning About Grand Ocean Advanced Resources' (HKG:65) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Grand Ocean Advanced Resources (HKG:65), the trends above didn't look too great.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Grand Ocean Advanced Resources, this is the formula:

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

0.017 = HK$3.3m ÷ (HK$260m - HK$59m) (Based on the trailing twelve months to December 2021).

So, Grand Ocean Advanced Resources has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 8.9%.

View our latest analysis for Grand Ocean Advanced Resources

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Grand Ocean Advanced Resources' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Grand Ocean Advanced Resources' ROCE Trend?

In terms of Grand Ocean Advanced Resources' historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 1.7% we see today. In addition to that, Grand Ocean Advanced Resources is now employing 23% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Grand Ocean Advanced Resources has done well to pay down its current liabilities to 23% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Grand Ocean Advanced Resources' ROCE

To see Grand Ocean Advanced Resources reducing the capital employed in the business in tandem with diminishing returns, is concerning. However the stock has delivered a 44% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know about the risks facing Grand Ocean Advanced Resources, we've discovered 3 warning signs that you should be aware of.

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.