What underlying fundamental trends can indicate that a company might be in decline? 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. Having said that, after a brief look, Chang Chun Eurasia Group (SHSE:600697) we aren't filled with optimism, but let's investigate further.
What Is Return On Capital Employed (ROCE)?
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 Chang Chun Eurasia Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥675m ÷ (CN¥20b - CN¥14b) (Based on the trailing twelve months to September 2024).
Therefore, Chang Chun Eurasia Group has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Multiline Retail industry average of 3.9% it's much better.
In the above chart we have measured Chang Chun Eurasia Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Chang Chun Eurasia Group for free.
The Trend Of ROCE
The trend of returns that Chang Chun Eurasia Group is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 11% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 26% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
On a separate but related note, it's important to know that Chang Chun Eurasia Group has a current liabilities to total assets ratio of 69%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Chang Chun Eurasia Group's ROCE
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Long term shareholders who've owned the stock over the last five years have experienced a 19% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you want to know some of the risks facing Chang Chun Eurasia Group we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.
While Chang Chun Eurasia 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.
