Returns On Capital Signal Difficult Times Ahead For Southern Packaging Group (SGX:BQP)

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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Southern Packaging Group (SGX:BQP), so let's see why.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Southern Packaging Group, this is the formula:

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

0.0059 = CN¥4.1m ÷ (CN¥1.1b - CN¥397m) (Based on the trailing twelve months to December 2020).

Therefore, Southern Packaging Group has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Packaging industry average of 10%.

Check out our latest analysis for Southern Packaging Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Southern Packaging Group's ROCE against it's prior returns. If you'd like to look at how Southern Packaging 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 Southern Packaging Group's ROCE Trend?

There is reason to be cautious about Southern Packaging Group, given the returns are trending downwards. To be more specific, the ROCE was 11% 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 Southern Packaging Group to turn into a multi-bagger.

What We Can Learn From Southern Packaging Group's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Southern Packaging Group (of which 2 are a bit concerning!) that you should know about.

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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