Chia Tai Enterprises International (HKG:3839) Will Be Hoping To Turn Its Returns On Capital Around

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. 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Chia Tai Enterprises International (HKG:3839), the trends above didn't look too great.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Chia Tai Enterprises International is:

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

0.0055 = US$1.6m ÷ (US$390m - US$108m) (Based on the trailing twelve months to September 2024).

Therefore, Chia Tai Enterprises International has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Food industry average of 7.5%.

View our latest analysis for Chia Tai Enterprises International

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'd like to look at how Chia Tai Enterprises International has performed in the past in other metrics, you can view this free graph of Chia Tai Enterprises International's past earnings, revenue and cash flow.

What Does the ROCE Trend For Chia Tai Enterprises International Tell Us?

We are a bit worried about the trend of returns on capital at Chia Tai Enterprises International. To be more specific, the ROCE was 2.2% five years ago, but since then it has dropped noticeably. 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. If these trends continue, we wouldn't expect Chia Tai Enterprises International to turn into a multi-bagger.

On a side note, Chia Tai Enterprises International's current liabilities have increased over the last five years to 28% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

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 must expect better things on the horizon though because the stock has risen 3.9% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Chia Tai Enterprises International does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Chia Tai Enterprises International 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.