Returns On Capital Signal Difficult Times Ahead For Pacific Online (HKG:543)

What underlying fundamental trends can indicate that a company might be 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. 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 Pacific Online (HKG:543), we've spotted some signs that it could be struggling, so let's investigate.

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Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Pacific Online, this is the formula:

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

0.071 = CN¥49m ÷ (CN¥982m - CN¥286m) (Based on the trailing twelve months to December 2024).

Thus, Pacific Online has an ROCE of 7.1%. Even though it's in line with the industry average of 7.1%, it's still a low return by itself.

Check out our latest analysis for Pacific Online

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 Pacific Online has performed in the past in other metrics, you can view this free graph of Pacific Online's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trend of returns that Pacific Online is generating are raising some concerns. To be more specific, today's ROCE was 21% five years ago but has since fallen to 7.1%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 31% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

Our Take On Pacific Online's ROCE

In summary, it's unfortunate that Pacific Online is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 41% 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.

One final note, you should learn about the 3 warning signs we've spotted with Pacific Online (including 2 which are concerning) .

While Pacific Online 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.