Investors Could Be Concerned With Asia Pacific Wire & Cable's (NASDAQ:APWC) Returns On Capital
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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Asia Pacific Wire & Cable (NASDAQ:APWC), the trends above didn't look too great.
Understanding 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. The formula for this calculation on Asia Pacific Wire & Cable is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = US$7.4m ÷ (US$371m - US$134m) (Based on the trailing twelve months to December 2022).
Therefore, Asia Pacific Wire & Cable has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Electrical industry average of 11%.
View our latest analysis for Asia Pacific Wire & Cable
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 Asia Pacific Wire & Cable's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Asia Pacific Wire & Cable Tell Us?
There is reason to be cautious about Asia Pacific Wire & Cable, given the returns are trending downwards. To be more specific, the ROCE was 5.2% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Asia Pacific Wire & Cable becoming one if things continue as they have.
What We Can Learn From Asia Pacific Wire & Cable's ROCE
In summary, it's unfortunate that Asia Pacific Wire & Cable is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 24% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
Asia Pacific Wire & Cable does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...
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.
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