Be Wary Of New World Department Store China (HKG:825) And Its Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? 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 New World Department Store China (HKG:825), we weren't too upbeat about how things were going.

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

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. Analysts use this formula to calculate it for New World Department Store China:

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

0.015 = HK$100m ÷ (HK$11b - HK$4.0b) (Based on the trailing twelve months to June 2023).

Therefore, New World Department Store China has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 2.8%.

View our latest analysis for New World Department Store China

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're interested in investigating New World Department Store China's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From New World Department Store China's ROCE Trend?

There is reason to be cautious about New World Department Store China, given the returns are trending downwards. To be more specific, the ROCE was 4.3% 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 New World Department Store China becoming one if things continue as they have.

The Bottom Line On New World Department Store China's ROCE

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. Unsurprisingly then, the stock has dived 79% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

New World Department Store China does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

While New World Department Store China 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.