SFK Construction Holdings (HKG:1447) Could Be Struggling To Allocate Capital

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into SFK Construction Holdings (HKG:1447), the trends above didn't look too great.

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 SFK Construction Holdings, this is the formula:

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

0.079 = HK$31m ÷ (HK$1.4b - HK$973m) (Based on the trailing twelve months to June 2023).

So, SFK Construction Holdings has an ROCE of 7.9%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 6.5%.

View 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.

So How Is SFK Construction Holdings' ROCE Trending?

In terms of SFK Construction Holdings' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 40% five years ago, but since then it has dropped noticeably. 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. If these trends continue, we wouldn't expect SFK Construction Holdings to turn into a multi-bagger.

On a separate but related note, it's important to know that SFK Construction Holdings has a current liabilities to total assets ratio of 71%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

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. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for SFK Construction Holdings (of which 3 make us uncomfortable!) that you should know about.

While SFK Construction Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.