Lap Kei Engineering (Holdings) (HKG:1690) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Lap Kei Engineering (Holdings) (HKG:1690), we've spotted some signs that it could be struggling, so let's investigate.

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

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. The formula for this calculation on Lap Kei Engineering (Holdings) is:

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

0.13 = HK$18m ÷ (HK$224m - HK$81m) (Based on the trailing twelve months to June 2022).

Therefore, Lap Kei Engineering (Holdings) has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 7.0% it's much better.

Check out our latest analysis for Lap Kei Engineering (Holdings)

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

What The Trend Of ROCE Can Tell Us

In terms of Lap Kei Engineering (Holdings)'s historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 36% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Lap Kei Engineering (Holdings) to turn into a multi-bagger.

The Bottom Line On Lap Kei Engineering (Holdings)'s 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 75% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Lap Kei Engineering (Holdings) we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

While Lap Kei Engineering (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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.