Some Investors May Be Worried About Maoye International Holdings' (HKG:848) Returns On Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Maoye International Holdings (HKG:848), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Maoye International Holdings, this is the formula:

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

0.03 = CN¥988m ÷ (CN¥50b - CN¥18b) (Based on the trailing twelve months to December 2022).

Thus, Maoye International Holdings has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 5.1%.

View our latest analysis for Maoye International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Maoye International Holdings' ROCE against it's prior returns. If you're interested in investigating Maoye International Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

SWOT Analysis for Maoye International Holdings

The Trend Of ROCE

There is reason to be cautious about Maoye International Holdings, given the returns are trending downwards. About five years ago, returns on capital were 5.7%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Maoye International Holdings becoming one if things continue as they have.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 69% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Maoye International Holdings does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

While Maoye International Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.