Investors Could Be Concerned With SFK Construction Holdings' (HKG:1447) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into SFK Construction Holdings (HKG:1447), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for SFK Construction Holdings, this is the formula:

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

0.019 = HK$7.5m ÷ (HK$1.5b - HK$1.1b) (Based on the trailing twelve months to June 2022).

Thus, SFK Construction Holdings has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.0%.

See our latest analysis for SFK Construction Holdings

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

What Can We Tell From SFK Construction Holdings' ROCE Trend?

There is reason to be cautious about SFK Construction Holdings, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 33% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on SFK Construction Holdings becoming one if things continue as they have.

On a side note, SFK Construction Holdings' current liabilities are still rather high at 73% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On SFK Construction Holdings' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. We expect this has contributed to the stock plummeting 74% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 4 warning signs for SFK Construction Holdings (1 is potentially serious) 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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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.