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Investors Could Be Concerned With Duty Free International's (SGX:5SO) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Duty Free International (SGX:5SO), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Duty Free International, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.002 = RM861k ÷ (RM477m - RM39m) (Based on the trailing twelve months to August 2022).

Thus, Duty Free International has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 8.2%.

See our latest analysis for Duty Free International

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Historical performance is a great place to start when researching a stock so above you can see the gauge for Duty Free International's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Duty Free International, check out these free graphs here.

How Are Returns Trending?

In terms of Duty Free International's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 12% five years ago but has since fallen to 0.2%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 28% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line On Duty Free International's ROCE

To see Duty Free International reducing the capital employed in the business in tandem with diminishing returns, is concerning. Long term shareholders who've owned the stock over the last five years have experienced a 41% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Duty Free International, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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