Can Pacific Online (HKG:543) Turn Things Around?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Having said that, after a brief look, Pacific Online (HKG:543) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What is it?

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 Pacific Online is:

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

0.21 = CN¥194m ÷ (CN¥1.3b - CN¥347m) (Based on the trailing twelve months to June 2020).

Therefore, Pacific Online has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Interactive Media and Services industry average of 13%.

See our latest analysis for Pacific Online

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pacific Online's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Pacific Online, check out these free graphs here.

How Are Returns Trending?

In terms of Pacific Online's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 28% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Pacific Online becoming one if things continue as they have.

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. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Pacific Online we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Pacific Online is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. 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.
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