Some Investors May Be Worried About Computime Group's (HKG:320) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Computime Group (HKG:320), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Computime Group, this is the formula:

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

0.07 = HK$98m ÷ (HK$2.9b - HK$1.5b) (Based on the trailing twelve months to September 2022).

Therefore, Computime Group has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Electronic industry average of 9.6%.

See our latest analysis for Computime Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Computime Group's ROCE against it's prior returns. If you'd like to look at how Computime Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Computime Group's ROCE Trend?

We are a bit worried about the trend of returns on capital at Computime Group. About five years ago, returns on capital were 14%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Computime Group becoming one if things continue as they have.

On a side note, Computime Group's current liabilities are still rather high at 52% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Computime Group's ROCE

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 48% 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.

One final note, you should learn about the 4 warning signs we've spotted with Computime Group (including 1 which is a bit concerning) .

While Computime Group 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.