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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? 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 glancing at the trends within Qian Hu (SGX:BCV), we weren't too hopeful.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Qian Hu:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = S$708k ÷ (S$58m - S$15m) (Based on the trailing twelve months to December 2024).
Therefore, Qian Hu has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Leisure industry average of 9.5%.
View our latest analysis for Qian Hu
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 Qian Hu has performed in the past in other metrics, you can view this free graph of Qian Hu's past earnings, revenue and cash flow.
The Trend Of ROCE
The trend of ROCE at Qian Hu is showing some signs of weakness. The company used to generate 3.0% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 20% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.
The Bottom Line
In summary, it's unfortunate that Qian Hu is shrinking its capital base and also generating lower returns. Despite the concerning underlying trends, the stock has actually gained 37% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
One more thing: We've identified 2 warning signs with Qian Hu (at least 1 which is significant) , and understanding them would certainly be useful.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.