Capital Allocation Trends At Goldpac Group (HKG:3315) Aren't Ideal

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. In light of that, from a first glance at Goldpac Group (HKG:3315), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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. Analysts use this formula to calculate it for Goldpac Group:

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

0.058 = CN¥118m ÷ (CN¥2.6b - CN¥567m) (Based on the trailing twelve months to December 2021).

Therefore, Goldpac Group has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 9.5%.

See our latest analysis for Goldpac Group

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

How Are Returns Trending?

There is reason to be cautious about Goldpac Group, given the returns are trending downwards. About five years ago, returns on capital were 8.3%, 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. 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 Goldpac Group becoming one if things continue as they have.

Our Take On Goldpac Group's ROCE

In summary, it's unfortunate that Goldpac Group is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 23% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Goldpac Group (including 2 which are potentially serious) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.