Noel Gifts International (SGX:543) Will Be Hoping To Turn Its Returns On Capital Around

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Noel Gifts International (SGX:543), so let's see why.

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 Noel Gifts International:

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

0.004 = S$131k ÷ (S$37m - S$4.1m) (Based on the trailing twelve months to December 2020).

So, Noel Gifts International has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 11%.

See our latest analysis for Noel Gifts International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Noel Gifts International's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Noel Gifts International, check out these free graphs here.

So How Is Noel Gifts International's ROCE Trending?

There is reason to be cautious about Noel Gifts International, given the returns are trending downwards. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Noel Gifts International becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Noel Gifts International is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 4.1% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we found 4 warning signs for Noel Gifts International (1 can't be ignored) you should be aware of.

While Noel Gifts International 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. 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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