Here's What's Concerning About CK Hutchison Holdings' (HKG:1) Returns On Capital

By
Simply Wall St
Published
October 06, 2021
SEHK:1
Source: Shutterstock

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within CK Hutchison Holdings (HKG:1), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on CK Hutchison Holdings is:

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

0.033 = HK$36b ÷ (HK$1.3t - HK$194b) (Based on the trailing twelve months to June 2021).

So, CK Hutchison Holdings has an ROCE of 3.3%. Even though it's in line with the industry average of 2.9%, it's still a low return by itself.

View our latest analysis for CK Hutchison Holdings

roce
SEHK:1 Return on Capital Employed October 7th 2021

Above you can see how the current ROCE for CK Hutchison 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 CK Hutchison Holdings here for free.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at CK Hutchison Holdings. Unfortunately the returns on capital have diminished from the 4.3% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect CK Hutchison Holdings to turn into a multi-bagger.

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. Long term shareholders who've owned the stock over the last five years have experienced a 34% 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.

On a final note, we've found 3 warning signs for CK Hutchison Holdings that we think you should be aware of.

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.

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