Here's What's Concerning About SFK Construction Holdings' (HKG:1447) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into SFK Construction Holdings (HKG:1447), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for SFK Construction Holdings:

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

0.086 = HK$33m ÷ (HK$1.5b - HK$1.1b) (Based on the trailing twelve months to June 2024).

So, SFK Construction Holdings has an ROCE of 8.6%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 5.8%.

See our latest analysis for SFK Construction 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 SFK Construction Holdings has performed in the past in other metrics, you can view this free graph of SFK Construction Holdings' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trend of returns that SFK Construction Holdings is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 8.6% we see today. In addition to that, SFK Construction Holdings is now employing 25% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

Another thing to note, SFK Construction Holdings has a high ratio of current liabilities to total assets of 75%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On SFK Construction Holdings' ROCE

In summary, it's unfortunate that SFK Construction Holdings is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 14% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

SFK Construction Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit concerning...

While SFK Construction Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.