To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. Having said that, after a brief look, New World Department Store China (HKG:825) we aren't filled with optimism, but let's investigate further.

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 New World Department Store China, this is the formula:

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

0.033 = HK$215m ÷ (HK$10b - HK$3.8b) (Based on the trailing twelve months to June 2024).

Therefore, New World Department Store China has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 6.2%.

See our latest analysis for New World Department Store China

Historical performance is a great place to start when researching a stock so above you can see the gauge for New World Department Store China's ROCE against it's prior returns. If you're interested in investigating New World Department Store China's past further, check out this free graph covering New World Department Store China's past earnings, revenue and cash flow.

So How Is New World Department Store China's ROCE Trending?

In terms of New World Department Store China's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 4.7% 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on New World Department Store China becoming one if things continue as they have.

What We Can Learn From New World Department Store China's ROCE

In summary, it's unfortunate that New World Department Store China is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 77% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing to note, we've identified 2 warning signs with New World Department Store China and understanding them should be part of your investment process.

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.