Southern Packaging Group's (SGX:BQP) Returns On Capital Not Reflecting Well On The Business

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Southern Packaging Group (SGX:BQP) we aren't filled with optimism, but let's investigate further.

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. 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)

0.015 = CN¥10m ÷ (CN¥1.1b - CN¥418m) (Based on the trailing twelve months to June 2021).

Therefore, Southern Packaging Group has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 10%.

See 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're interested in investigating Southern Packaging Group's past further, check out 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. 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 Southern Packaging Group becoming one if things continue as they have.

The Key Takeaway

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. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Southern Packaging Group (including 3 which make us uncomfortable) .

While Southern Packaging 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.
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