What underlying fundamental trends can indicate that a company might be 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, A.Plus Group Holdings (HKG:1841) we aren't filled with optimism, but let's investigate further.
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 A.Plus Group Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = HK$6.5m ÷ (HK$144m - HK$33m) (Based on the trailing twelve months to March 2024).
Thus, A.Plus Group Holdings has an ROCE of 5.9%. On its own, that's a low figure but it's around the 7.0% average generated by the Commercial Services industry.
See our latest analysis for A.Plus Group Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for A.Plus Group Holdings' ROCE against it's prior returns. If you're interested in investigating A.Plus Group Holdings' past further, check out this free graph covering A.Plus Group Holdings' past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
The trend of ROCE at A.Plus Group Holdings is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 5.9% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 30% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.
What We Can Learn From A.Plus Group Holdings' ROCE
To see A.Plus Group Holdings reducing the capital employed in the business in tandem with diminishing returns, is concerning. Long term shareholders who've owned the stock over the last five years have experienced a 38% 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 A.Plus Group Holdings we've found 3 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.