Unity Group Holdings International (HKG:1539) Has Some Difficulty Using Its Capital Effectively

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. So after glancing at the trends within Unity Group Holdings International (HKG:1539), we weren't too hopeful.

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 Unity Group Holdings International, this is the formula:

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

0.024 = HK$8.2m ÷ (HK$479m - HK$133m) (Based on the trailing twelve months to September 2023).

Thus, Unity Group Holdings International has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 3.7%.

Check out our latest analysis for Unity Group Holdings International

In the above chart we have measured Unity Group Holdings International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Unity Group Holdings International for free.

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

We aren't too thrilled by the trend because ROCE has declined 84% over the last five years and despite the capital raising conducted before the latest reports, the business has -40% less capital employed.

The Bottom Line

In summary, it's unfortunate that Unity Group Holdings International is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 61% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Unity Group Holdings International, we've spotted 3 warning signs, and 2 of them are a bit unpleasant.

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.

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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.