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When researching a stock for investment, what can tell us that the company is 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Avi-Tech Holdings (SGX:1R6), so let's see why.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Avi-Tech Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = S$1.9m ÷ (S$58m - S$4.1m) (Based on the trailing twelve months to June 2024).
Therefore, Avi-Tech Holdings has an ROCE of 3.5%. Even though it's in line with the industry average of 3.6%, it's still a low return by itself.
See our latest analysis for Avi-Tech Holdings
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 Avi-Tech Holdings.
What Can We Tell From Avi-Tech Holdings' ROCE Trend?
We are a bit worried about the trend of returns on capital at Avi-Tech Holdings. Unfortunately the returns on capital have diminished from the 11% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Avi-Tech Holdings to turn into a multi-bagger.
The Key Takeaway
In summary, it's unfortunate that Avi-Tech Holdings is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 24% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Avi-Tech Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...