Is Southern Packaging Group (SGX:BQP) Shrinking?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Southern Packaging Group (SGX:BQP) we aren't filled with optimism, but let's investigate further.

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 Southern Packaging Group:

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

0.023 = CN¥16m ÷ (CN¥1.1b - CN¥397m) (Based on the trailing twelve months to December 2020).

So, Southern Packaging Group has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Packaging industry average of 10%.

View our latest analysis for Southern Packaging 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 Southern Packaging Group, check out these free graphs here.

What Can We Tell From Southern Packaging Group's ROCE Trend?

There is reason to be cautious about Southern Packaging Group, given the returns are trending downwards. About five years ago, returns on capital were 11%, 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. If these trends continue, we wouldn't expect Southern Packaging Group to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Southern Packaging Group is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 12% 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.

Southern Packaging Group does have some risks, we noticed 5 warning signs (and 3 which are potentially serious) we think you should know about.

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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