When researching a stock for investment, what can tell us that the company is in decline? 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 the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Tan Chong International (HKG:693) we aren't filled with optimism, but let's investigate further.
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 Tan Chong International, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = HK$367m ÷ (HK$23b - HK$7.7b) (Based on the trailing twelve months to June 2023).
Thus, Tan Chong International has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 4.0%.
See our latest analysis for Tan Chong International
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, revenue and cash flow of Tan Chong International, check out these free graphs here.
How Are Returns Trending?
There is reason to be cautious about Tan Chong International, given the returns are trending downwards. About five years ago, returns on capital were 5.2%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tan Chong International becoming one if things continue as they have.
The Bottom Line
In summary, it's unfortunate that Tan Chong International is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 24% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Tan Chong International does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are potentially serious...
While Tan Chong International 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.