Boyaa Interactive International (HKG:434) Is Finding It Tricky To Allocate Its Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Boyaa Interactive International (HKG:434), we weren't too upbeat about how things were going.

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 Boyaa Interactive International, this is the formula:

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

0.051 = CN¥109m ÷ (CN¥2.5b - CN¥321m) (Based on the trailing twelve months to September 2022).

Therefore, Boyaa Interactive International has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 6.8%.

Check out our latest analysis for Boyaa Interactive 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 Boyaa Interactive International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Boyaa Interactive International's ROCE Trend?

In terms of Boyaa Interactive International's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 7.8% 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 Boyaa Interactive International to turn into a multi-bagger.

The Bottom Line

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. This could explain why the stock has sunk a total of 78% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Boyaa Interactive International does have some risks, we noticed 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.