Is Nan Yang Dyeing & FinishingLtd (TPE:1410) Shrinking?

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Nan Yang Dyeing & FinishingLtd (TPE:1410), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Nan Yang Dyeing & FinishingLtd, this is the formula:

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

0.063 = NT$82m ÷ (NT$1.4b - NT$67m) (Based on the trailing twelve months to September 2020).

Thus, Nan Yang Dyeing & FinishingLtd has an ROCE of 6.3%. On its own that's a low return, but compared to the average of 4.1% generated by the Luxury industry, it's much better.

See our latest analysis for Nan Yang Dyeing & FinishingLtd

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 Nan Yang Dyeing & FinishingLtd 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 Nan Yang Dyeing & FinishingLtd's ROCE Trend?

In terms of Nan Yang Dyeing & FinishingLtd's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 10% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Nan Yang Dyeing & FinishingLtd to turn into a multi-bagger.

What We Can Learn From Nan Yang Dyeing & FinishingLtd's ROCE

In summary, it's unfortunate that Nan Yang Dyeing & FinishingLtd is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 70% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Nan Yang Dyeing & FinishingLtd does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

While Nan Yang Dyeing & FinishingLtd 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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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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