Greatview Aseptic Packaging's (HKG:468) Returns On Capital Tell Us There Is Reason To Feel Uneasy
To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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 to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Greatview Aseptic Packaging (HKG:468), we weren't too hopeful.
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. To calculate this metric for Greatview Aseptic Packaging, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.096 = CN¥247m ÷ (CN¥3.8b - CN¥1.3b) (Based on the trailing twelve months to June 2022).
So, Greatview Aseptic Packaging has an ROCE of 9.6%. Even though it's in line with the industry average of 9.6%, it's still a low return by itself.
See our latest analysis for Greatview Aseptic Packaging
Above you can see how the current ROCE for Greatview Aseptic Packaging compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Greatview Aseptic Packaging's ROCE Trend?
There is reason to be cautious about Greatview Aseptic Packaging, given the returns are trending downwards. About five years ago, returns on capital were 17%, 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. 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 Greatview Aseptic Packaging becoming one if things continue as they have.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 33%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 9.6%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
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. Long term shareholders who've owned the stock over the last five years have experienced a 51% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you want to continue researching Greatview Aseptic Packaging, you might be interested to know about the 1 warning sign that our analysis has discovered.
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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.
Greatview Aseptic Packaging
Greatview Aseptic Packaging Company Limited, an investment holding company, manufactures, distributes, and sells paper packaging products and filling machines to dairy and non-carbonated soft drink producers in the People's Republic of China and internationally.
Excellent balance sheet and fair value.