The Returns On Capital At Computime Group (HKG:320) Don't Inspire Confidence

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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 the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Computime Group (HKG:320) we aren't filled with optimism, but let's investigate further.

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. 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)

0.039 = HK$56m ÷ (HK$2.9b - HK$1.5b) (Based on the trailing twelve months to March 2023).

Thus, Computime Group has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Electronic industry average of 6.1%.

Check out our latest analysis for Computime Group

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 want to delve into the historical earnings, revenue and cash flow of Computime Group, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Computime Group's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 9.9% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 51%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Computime Group's ROCE

In summary, it's unfortunate that Computime Group is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 38% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Computime Group does come with some risks, and we've found 3 warning signs that you should be aware of.

While Computime Group 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.