Chuan Holdings' (HKG:1420) Returns On Capital Tell Us There Is Reason To Feel Uneasy

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Chuan Holdings (HKG:1420), so let's see why.

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. Analysts use this formula to calculate it for Chuan Holdings:

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

0.0028 = S$259k ÷ (S$114m - S$21m) (Based on the trailing twelve months to June 2023).

Therefore, Chuan Holdings has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.5%.

View our latest analysis for Chuan Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chuan Holdings' ROCE against it's prior returns. If you'd like to look at how Chuan 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 Chuan Holdings' ROCE Trending?

There is reason to be cautious about Chuan Holdings, given the returns are trending downwards. To be more specific, the ROCE was 4.5% 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. 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 Chuan Holdings to turn into a multi-bagger.

The Bottom Line On Chuan Holdings' ROCE

In summary, it's unfortunate that Chuan Holdings is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 73% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Chuan Holdings we've found 5 warning signs (1 can't be ignored!) that you should be aware of before investing here.

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.

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.