Returns On Capital Signal Tricky Times Ahead For Hily Holding PJSC (ADX:HH)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Hily Holding PJSC (ADX:HH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Hily Holding PJSC:

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

0.035 = د.إ24m ÷ (د.إ1.0b - د.إ343m) (Based on the trailing twelve months to March 2022).

Therefore, Hily Holding PJSC has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 8.3%.

Our analysis indicates that HH is potentially undervalued!

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

The Trend Of ROCE

When we looked at the ROCE trend at Hily Holding PJSC, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.8% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Hily Holding PJSC's ROCE

In summary, we're somewhat concerned by Hily Holding PJSC's diminishing returns on increasing amounts of capital. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Hily Holding PJSC does have some risks though, and we've spotted 2 warning signs for Hily Holding PJSC that you might be interested in.

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.