What underlying fundamental trends can indicate that a company might be in decline? A business that’s potentially in decline often shows two trends, a return on capital employed (ROCE) that’s declining, and a base of capital employed that’s also declining. This reveals that the company isn’t compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Yummy Town (Cayman) Holdings (GTSM:2726), the trends above didn’t look too great.
What is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Yummy Town (Cayman) Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.03 = NT$26m ÷ (NT$1.7b – NT$791m) (Based on the trailing twelve months to June 2020).
So, Yummy Town (Cayman) Holdings has an ROCE of 3.0%. In absolute terms, that’s a low return and it also under-performs the Hospitality industry average of 4.6%.
Check out our latest analysis for Yummy Town (Cayman) Holdings
Above you can see how the current ROCE for Yummy Town (Cayman) Holdings compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Yummy Town (Cayman) Holdings here for free.
What Does the ROCE Trend For Yummy Town (Cayman) Holdings Tell Us?
There is reason to be cautious about Yummy Town (Cayman) Holdings, given the returns are trending downwards. About five years ago, returns on capital were 8.8%, however they’re now substantially lower than that as we saw above. 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. So because these trends aren’t typically conducive to creating a multi-bagger, we wouldn’t hold our breath on Yummy Town (Cayman) Holdings becoming one if things continue as they have.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 48%, which has impacted the ROCE. If current liabilities hadn’t increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company’s suppliers or short-term creditors, which can bring some risks of its own.In Conclusion…
In the end, the trend of lower returns on the same amount of capital isn’t typically an indication that we’re looking at a growth stock. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 83% return. In any case, the current underlying trends don’t bode well for long term performance so unless they reverse, we’d start looking elsewhere.
Yummy Town (Cayman) Holdings does have some risks, we noticed 6 warning signs (and 2 which are significant) we think you should know about.
While Yummy Town (Cayman) Holdings isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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Is Yummy Town (Cayman) Holdings (GTSM:2726) Struggling? - Simply Wall St
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