What financial metrics can indicate to us that a company is maturing or even 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. On that note, looking into Sa Sa International Holdings (HKG:178), we weren't too upbeat about how things were going.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sa Sa International Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = HK$247m ÷ (HK$2.5b - HK$867m) (Based on the trailing twelve months to September 2023).
So, Sa Sa International Holdings has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Specialty Retail industry.
Above you can see how the current ROCE for Sa Sa International Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Sa Sa International Holdings .
The Trend Of ROCE
The trend of ROCE at Sa Sa International Holdings is showing some signs of weakness. The company used to generate 23% on its capital five years ago but it has since fallen noticeably. In addition to that, Sa Sa International Holdings is now employing 41% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.
The Bottom Line
In summary, it's unfortunate that Sa Sa International Holdings is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 64% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Sa Sa International Holdings could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 178 on our platform quite valuable.
While Sa Sa International Holdings 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.