To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Rastar Group (SZSE:300043), we weren't too upbeat about how things were going.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Rastar Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = CN¥36m ÷ (CN¥4.6b - CN¥1.9b) (Based on the trailing twelve months to September 2023).
Therefore, Rastar Group has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Leisure industry average of 6.6%.
Check out our latest analysis for Rastar Group
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're interested in investigating Rastar Group's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We aren't inspired by the trend, given ROCE has reduced by 83% over the last five years and Rastar Group is applying -29% less capital in the business, even after the capital raising they conducted (prior to their latest reported figures).
On a separate but related note, it's important to know that Rastar Group has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Rastar Group's ROCE
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. In spite of that, the stock has delivered a 5.0% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
If you want to know some of the risks facing Rastar Group we've found 3 warning signs (2 are potentially serious!) 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.