When researching a stock for investment, what can tell us that the company is 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. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Ribo Fashion Group (SHSE:603196), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ribo Fashion Group is:

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

0.02 = CN¥17m ÷ (CN¥1.2b - CN¥406m) (Based on the trailing twelve months to September 2023).

Thus, Ribo Fashion Group has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Luxury industry average of 5.4%.

View our latest analysis for Ribo Fashion Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ribo Fashion Group's ROCE against it's prior returns. If you'd like to look at how Ribo Fashion Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Ribo Fashion Group's ROCE Trending?

There is reason to be cautious about Ribo Fashion Group, given the returns are trending downwards. About five years ago, returns on capital were 8.0%, however they're now substantially lower than that as we saw above. 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 Ribo Fashion Group becoming one if things continue as they have.

On a side note, Ribo Fashion Group's current liabilities have increased over the last five years to 33% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.0%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

In Conclusion...

In summary, it's unfortunate that Ribo Fashion Group is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 45% 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.

One more thing: We've identified 3 warning signs with Ribo Fashion Group (at least 1 which can't be ignored) , and understanding these would certainly be useful.

While Ribo Fashion Group 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.