Nanfang Communication Holdings (HKG:1617) Could Be At Risk Of Shrinking As A Company

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Nanfang Communication Holdings (HKG:1617), we weren't too upbeat about how things were going.

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What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Nanfang Communication Holdings is:

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

0.012 = CN¥12m ÷ (CN¥1.5b - CN¥508m) (Based on the trailing twelve months to December 2024).

Therefore, Nanfang Communication Holdings has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Communications industry average of 4.1%.

See our latest analysis for Nanfang Communication Holdings

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 Nanfang Communication Holdings has performed in the past in other metrics, you can view this free graph of Nanfang Communication Holdings' past earnings, revenue and cash flow.

What Can We Tell From Nanfang Communication Holdings' ROCE Trend?

We are a bit worried about the trend of returns on capital at Nanfang Communication Holdings. To be more specific, the ROCE was 4.6% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Nanfang Communication Holdings becoming one if things continue as they have.

The Bottom Line On Nanfang Communication Holdings' 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 96% 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.

Like most companies, Nanfang Communication Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While Nanfang Communication 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.