Some Investors May Be Worried About Joy Industrial's (GTSM:4559) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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. And from a first read, things don't look too good at Joy Industrial (GTSM:4559), so let's see why.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Joy Industrial, this is the formula:

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

0.012 = NT$12m ÷ (NT$1.7b - NT$743m) (Based on the trailing twelve months to June 2020).

Thus, Joy Industrial has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 11%.

See our latest analysis for Joy Industrial

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'd like to look at how Joy Industrial has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Joy Industrial's ROCE Trending?

In terms of Joy Industrial's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 4.2% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect Joy Industrial to turn into a multi-bagger.

Another thing to note, Joy Industrial has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Joy Industrial's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 24% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Joy Industrial does have some risks, we noticed 4 warning signs (and 1 which is potentially serious) we think 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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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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