Should We Be Excited About The Trends Of Returns At HPC Holdings (HKG:1742)?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at HPC Holdings (HKG:1742) and its ROCE trend, we weren't exactly thrilled.

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 HPC Holdings is:

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

0.10 = S$11m ÷ (S$175m - S$64m) (Based on the trailing twelve months to April 2020).

Thus, HPC Holdings has an ROCE of 10.0%. In absolute terms, that's a low return but it's around the Construction industry average of 11%.

Check out our latest analysis for HPC Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of HPC Holdings, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at HPC Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 43% over the last four years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, HPC Holdings has done well to pay down its current liabilities to 37% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From HPC Holdings' ROCE

In summary, we're somewhat concerned by HPC Holdings' diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 23% over the last year, so it looks like investors are recognizing these changes. 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 HPC Holdings we've found 3 warning signs (1 can't be ignored!) that you should be aware of before investing here.

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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