What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount 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. And from a first read, things don't look too good at Ribo Fashion Group (SHSE:603196), so let's see why.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Ribo Fashion Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = CN¥25m ÷ (CN¥1.2b - CN¥406m) (Based on the trailing twelve months to September 2023).
Thus, Ribo Fashion Group has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Luxury industry average of 5.4%.
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're interested in investigating Ribo Fashion Group's past further, check out this free graph covering Ribo Fashion Group's past earnings, revenue and cash flow.
So How Is Ribo Fashion Group's ROCE Trending?
There is reason to be cautious about Ribo Fashion Group, given the returns are trending downwards. To be more specific, the ROCE was 8.0% five years ago, but since then it has dropped noticeably. 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 Ribo Fashion Group to turn into a multi-bagger.
On a side note, Ribo Fashion Group's current liabilities have increased over the last five years to 33% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
The Bottom Line On Ribo Fashion Group's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 21% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
On a final note, we found 3 warning signs for Ribo Fashion Group (1 is potentially serious) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.