When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at China Aluminum Cans Holdings (HKG:6898), we've spotted some signs that it could be struggling, so let's investigate.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for China Aluminum Cans Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = HK$21m ÷ (HK$303m - HK$25m) (Based on the trailing twelve months to June 2024).
So, China Aluminum Cans Holdings has an ROCE of 7.5%. Even though it's in line with the industry average of 6.6%, it's still a low return by itself.
Check out our latest analysis for China Aluminum Cans Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for China Aluminum Cans Holdings' ROCE against it's prior returns. If you're interested in investigating China Aluminum Cans Holdings' past further, check out this free graph covering China Aluminum Cans Holdings' past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
The trend of returns that China Aluminum Cans Holdings is generating are raising some concerns. The company used to generate 9.6% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 20% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. 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.
What We Can Learn From China Aluminum Cans Holdings' ROCE
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Yet despite these poor fundamentals, the stock has gained a huge 103% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
One more thing: We've identified 3 warning signs with China Aluminum Cans Holdings (at least 2 which are significant) , and understanding these would certainly be useful.
While China Aluminum Cans Holdings 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. 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.