Is Grand Ocean Retail Group (TPE:5907) Struggling?

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Grand Ocean Retail Group (TPE:5907), we've spotted some signs that it could be struggling, so let's investigate.

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. The formula for this calculation on Grand Ocean Retail Group is:

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

0.032 = NT$560m ÷ (NT$23b - NT$6.2b) (Based on the trailing twelve months to September 2020).

Thus, Grand Ocean Retail Group has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 5.1%.

View our latest analysis for Grand Ocean Retail Group

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 want to delve into the historical earnings, revenue and cash flow of Grand Ocean Retail Group, check out these free graphs here.

What Does the ROCE Trend For Grand Ocean Retail Group Tell Us?

In terms of Grand Ocean Retail Group's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 10% five years ago, but since then it has dropped noticeably. 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 Grand Ocean Retail Group to turn into a multi-bagger.

On a related note, Grand Ocean Retail Group has decreased its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Grand Ocean Retail Group's ROCE

In summary, it's unfortunate that Grand Ocean Retail Group is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 3.8% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Grand Ocean Retail Group (including 1 which is a bit concerning) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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