To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Atlinks Group (HKG:8043), the trends above didn't look too great.
Return On Capital Employed (ROCE): What is it?
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 Atlinks Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) Ă· (Total Assets - Current Liabilities)
0.083 = €880k ÷ (€31m - €20m) (Based on the trailing twelve months to December 2020).
Therefore, Atlinks Group has an ROCE of 8.3%. In absolute terms, that's a low return, but it's much better than the Communications industry average of 5.1%.
Check out our latest analysis for Atlinks 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'd like to look at how Atlinks 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 Atlinks Group's ROCE Trend?
There is reason to be cautious about Atlinks Group, given the returns are trending downwards. To be more specific, the ROCE was 22% 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Atlinks Group to turn into a multi-bagger.
On a side note, Atlinks Group's current liabilities are still rather high at 65% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
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 54% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you'd like to know more about Atlinks Group, we've spotted 3 warning signs, and 2 of them are a bit concerning.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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About SEHK:8043
Atlinks Group
An investment holding company, designs, develops, and sells home and office telecommunication products to consumer retail chain stores, telecom operators, and distributors worldwide.
Adequate balance sheet and fair value.