CTR Holdings (HKG:1416) Is Reinvesting At Lower Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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)?

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 CTR Holdings, this is the formula:

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

0.16 = S$8.4m ÷ (S$83m - S$30m) (Based on the trailing twelve months to August 2023).

Thus, CTR Holdings has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 8.3% it's much better.

Check out our latest analysis for CTR Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how CTR Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is CTR Holdings' ROCE Trending?

When we looked at the ROCE trend at CTR Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 39%, but since then they've fallen to 16%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, CTR Holdings has decreased its current liabilities to 37% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by CTR Holdings' reinvestment in its own business, we're aware that returns are shrinking. Moreover, since the stock has crumbled 84% over the last three years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think CTR Holdings has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing CTR Holdings that you might find interesting.

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.