Capital Allocation Trends At Unity Group Holdings International (HKG:1539) Aren't Ideal

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Unity Group Holdings International (HKG:1539), we've spotted some signs that it could be struggling, so let's investigate.

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. The formula for this calculation on Unity Group Holdings International is:

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

0.00059 = HK$226k ÷ (HK$521m - HK$141m) (Based on the trailing twelve months to September 2024).

Thus, Unity Group Holdings International has an ROCE of 0.06%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 5.9%.

See our latest analysis for Unity Group Holdings International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Unity Group Holdings International's ROCE against it's prior returns. If you'd like to look at how Unity Group Holdings International has performed in the past in other metrics, you can view this free graph of Unity Group Holdings International's past earnings, revenue and cash flow.

What Does the ROCE Trend For Unity Group Holdings International Tell Us?

We aren't inspired by the trend, given ROCE has reduced by 100% over the last five years and Unity Group Holdings International is applying -27% less capital in the business, even after the capital raising they conducted (prior to their latest reported figures).

What We Can Learn From Unity Group Holdings International's ROCE

In summary, it's unfortunate that Unity Group Holdings International is shrinking its capital base and also generating lower returns. Yet despite these concerning fundamentals, the stock has performed strongly with a 44% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Unity Group Holdings International (of which 1 is significant!) that you should know about.

While Unity Group Holdings International 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.