Investors Could Be Concerned With Natural Beauty Bio-Technology's (HKG:157) Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Natural Beauty Bio-Technology (HKG:157), so let's see why.

Understanding 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. The formula for this calculation on Natural Beauty Bio-Technology is:

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

0.076 = HK$49m ÷ (HK$885m - HK$237m) (Based on the trailing twelve months to June 2021).

Thus, Natural Beauty Bio-Technology has an ROCE of 7.6%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 12%.

See our latest analysis for Natural Beauty Bio-Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Natural Beauty Bio-Technology's ROCE against it's prior returns. If you're interested in investigating Natural Beauty Bio-Technology's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Natural Beauty Bio-Technology's ROCE Trend?

There is reason to be cautious about Natural Beauty Bio-Technology, given the returns are trending downwards. To be more specific, the ROCE was 22% 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. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Natural Beauty Bio-Technology becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Natural Beauty Bio-Technology is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 27% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Natural Beauty Bio-Technology, we've spotted 2 warning signs, and 1 of them is concerning.

While Natural Beauty Bio-Technology 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.