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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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Duty Free International (SGX:5SO), the trends above didn't look too great.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for Duty Free International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = RM12m ÷ (RM461m - RM19m) (Based on the trailing twelve months to August 2024).
Thus, Duty Free International has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 16%.
See our latest analysis for Duty Free 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'd like to look at how Duty Free International has performed in the past in other metrics, you can view this free graph of Duty Free International's past earnings, revenue and cash flow.
So How Is Duty Free International's ROCE Trending?
The trend of ROCE at Duty Free International is showing some signs of weakness. To be more specific, today's ROCE was 6.8% five years ago but has since fallen to 2.8%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 34% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.
Our Take On Duty Free International's ROCE
To see Duty Free International reducing the capital employed in the business in tandem with diminishing returns, is concerning. It should come as no surprise then that the stock has fallen 28% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you want to know some of the risks facing Duty Free International we've found 4 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.