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If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into QAF (SGX:Q01), 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 QAF:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = S$17m ÷ (S$665m - S$119m) (Based on the trailing twelve months to December 2022).
So, QAF has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Food industry average of 12%.
See our latest analysis for QAF
Historical performance is a great place to start when researching a stock so above you can see the gauge for QAF's ROCE against it's prior returns. If you're interested in investigating QAF's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For QAF Tell Us?
In terms of QAF's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 5.9% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on QAF becoming one if things continue as they have.
The Bottom Line
In summary, it's unfortunate that QAF is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 17% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
One more thing: We've identified 2 warning signs with QAF (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.