When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within China Aluminum Cans Holdings (HKG:6898), we weren't too hopeful.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for China Aluminum Cans Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = HK$20m ÷ (HK$303m - HK$25m) (Based on the trailing twelve months to June 2024).
Thus, China Aluminum Cans Holdings has an ROCE of 7.2%. In absolute terms, that's a low return but it's around the Packaging industry average of 6.4%.
See our latest analysis for China Aluminum Cans Holdings
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of China Aluminum Cans Holdings.
So How Is China Aluminum Cans Holdings' ROCE Trending?
We are a bit anxious about the trends of ROCE at China Aluminum Cans Holdings. 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. 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. If these underlying trends continue, we wouldn't be too optimistic going forward.
What We Can Learn From China Aluminum Cans Holdings' ROCE
In summary, it's unfortunate that China Aluminum Cans Holdings is shrinking its capital base and also generating lower returns. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
On a final note, we found 3 warning signs for China Aluminum Cans Holdings (1 doesn't sit too well with us) you should be aware of.
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.