Returns On Capital Tell Us A Lot About Eagle Cold Storage Enterprise (GTSM:8905)

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Eagle Cold Storage Enterprise (GTSM:8905), so let's see why.

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. Analysts use this formula to calculate it for Eagle Cold Storage Enterprise:

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

0.016 = NT$43m ÷ (NT$4.3b - NT$1.5b) (Based on the trailing twelve months to September 2020).

So, Eagle Cold Storage Enterprise has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Food industry average of 8.5%.

See our latest analysis for Eagle Cold Storage Enterprise

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 Eagle Cold Storage Enterprise's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Eagle Cold Storage Enterprise Tell Us?

We are a bit worried about the trend of returns on capital at Eagle Cold Storage Enterprise. To be more specific, the ROCE was 14% 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. 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 Eagle Cold Storage Enterprise to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. However the stock has delivered a 52% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Eagle Cold Storage Enterprise (of which 1 is a bit unpleasant!) that you should know about.

While Eagle Cold Storage Enterprise 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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