If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Maoye Commercial (SHSE:600828), we weren't too upbeat about how things were going.
Return On Capital Employed (ROCE): What Is It?
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 Maoye Commercial, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = CN¥499m ÷ (CN¥20b - CN¥5.8b) (Based on the trailing twelve months to March 2024).
Therefore, Maoye Commercial has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 4.6%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Maoye Commercial's ROCE against it's prior returns. If you'd like to look at how Maoye Commercial has performed in the past in other metrics, you can view this free graph of Maoye Commercial's past earnings, revenue and cash flow.
What Does the ROCE Trend For Maoye Commercial Tell Us?
We are a bit worried about the trend of returns on capital at Maoye Commercial. About five years ago, returns on capital were 18%, 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. 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 Maoye Commercial to turn into a multi-bagger.
On a related note, Maoye Commercial has decreased its current liabilities to 29% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Maoye Commercial's ROCE
In summary, it's unfortunate that Maoye Commercial is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 34% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Maoye Commercial (of which 2 can't be ignored!) that you should know about.
While Maoye Commercial isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
