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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Asia Pacific Wire & Cable (NASDAQ:APWC), 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. To calculate this metric for Asia Pacific Wire & Cable, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0067 = US$1.5m ÷ (US$367m - US$141m) (Based on the trailing twelve months to December 2023).
So, Asia Pacific Wire & Cable has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 13%.
View our latest analysis for Asia Pacific Wire & Cable
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 Asia Pacific Wire & Cable.
So How Is Asia Pacific Wire & Cable's ROCE Trending?
There is reason to be cautious about Asia Pacific Wire & Cable, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 3.7% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Asia Pacific Wire & Cable to turn into a multi-bagger.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 38%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.7%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.