Investors Could Be Concerned With Boyaa Interactive International's (HKG:434) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Boyaa Interactive International (HKG:434), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for Boyaa Interactive International:

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

0.053 = CN¥108m ÷ (CN¥2.3b - CN¥271m) (Based on the trailing twelve months to September 2021).

Therefore, Boyaa Interactive International has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 10%.

See 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.

How Are Returns Trending?

In terms of Boyaa Interactive International's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 10% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect Boyaa Interactive International to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Boyaa Interactive International is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 89% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Boyaa Interactive International does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

While Boyaa Interactive 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.