Is This A Sign of Things To Come At Nan Ren Lake Leisure Amusement (GTSM:5905)?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. And from a first read, things don't look too good at Nan Ren Lake Leisure Amusement (GTSM:5905), so let's see why.

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. To calculate this metric for Nan Ren Lake Leisure Amusement, this is the formula:

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

0.00032 = NT$893k ÷ (NT$3.9b - NT$1.2b) (Based on the trailing twelve months to September 2020).

Therefore, Nan Ren Lake Leisure Amusement has an ROCE of 0.03%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 5.6%.

See our latest analysis for Nan Ren Lake Leisure Amusement

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're interested in investigating Nan Ren Lake Leisure Amusement's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Nan Ren Lake Leisure Amusement's ROCE Trend?

We are a bit worried about the trend of returns on capital at Nan Ren Lake Leisure Amusement. To be more specific, the ROCE was 4.5% 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 Nan Ren Lake Leisure Amusement becoming one if things continue as they have.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 61% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 4 warning signs with Nan Ren Lake Leisure Amusement (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

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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