If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at IPE Group (HKG:929), so let's see why.
What Is Return On Capital Employed (ROCE)?
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 IPE Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = HK$25m ÷ (HK$2.5b - HK$330m) (Based on the trailing twelve months to June 2024).
Therefore, IPE Group has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.1%.
Check out our latest analysis for IPE Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for IPE Group's ROCE against it's prior returns. If you'd like to look at how IPE Group has performed in the past in other metrics, you can view this free graph of IPE Group's past earnings, revenue and cash flow.
What Can We Tell From IPE Group's ROCE Trend?
In terms of IPE Group's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 4.3% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect IPE Group to turn into a multi-bagger.
What We Can Learn From IPE Group's ROCE
In summary, it's unfortunate that IPE Group 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 46% 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.
If you want to know some of the risks facing IPE Group we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.