Capital Allocation Trends At CTR Holdings (HKG:1416) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at CTR Holdings (HKG:1416) and its ROCE trend, we weren't exactly thrilled.

What Is 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. To calculate this metric for CTR Holdings, this is the formula:

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

0.034 = S$1.9m ÷ (S$120m - S$65m) (Based on the trailing twelve months to August 2024).

So, CTR Holdings has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.9%.

See our latest analysis for CTR Holdings

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

What Can We Tell From CTR Holdings' ROCE Trend?

On the surface, the trend of ROCE at CTR Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.4% from 25% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, CTR Holdings' current liabilities have increased over the last five years to 54% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 3.4%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that CTR Holdings is reinvesting for growth and has higher sales as a result. But since the stock has dived 84% in the last five years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

One final note, you should learn about the 3 warning signs we've spotted with CTR Holdings (including 1 which is potentially serious) .

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.