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. In light of that, from a first glance at New Toyo International Holdings (SGX:N08), we've spotted some signs that it could be struggling, so let's investigate.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for New Toyo International Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = S$3.4m ÷ (S$311m - S$87m) (Based on the trailing twelve months to June 2020).
Therefore, New Toyo International Holdings has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 6.5%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for New Toyo International Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of New Toyo International Holdings, check out these free graphs here.
So How Is New Toyo International Holdings' ROCE Trending?
In terms of New Toyo International Holdings' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 7.6% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 New Toyo International Holdings becoming one if things continue as they have.
What We Can Learn From New Toyo International Holdings' ROCE
In summary, it's unfortunate that New Toyo International Holdings is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 16% in 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.
On a final note, we found 3 warning signs for New Toyo International Holdings (1 can't be ignored) you should be aware of.
While New Toyo International Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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