Is Million Hope Industries Holdings (HKG:1897) Likely To Turn Things Around?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Million Hope Industries Holdings (HKG:1897) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Million Hope Industries Holdings:

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

0.034 = HK$20m ÷ (HK$654m - HK$65m) (Based on the trailing twelve months to September 2020).

Thus, Million Hope Industries Holdings has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Building industry average of 12%.

See our latest analysis for Million Hope Industries 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'd like to look at how Million Hope Industries Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Million Hope Industries Holdings doesn't inspire confidence. Around four years ago the returns on capital were 50%, but since then they've fallen to 3.4%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Million Hope Industries Holdings has decreased its current liabilities to 9.9% of total assets. Considering it used to be 65%, that's a huge drop in that ratio and it would explain the decline in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

In Conclusion...

To conclude, we've found that Million Hope Industries Holdings is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 20% in the last year. Therefore based on the analysis done in this article, we don't think Million Hope Industries Holdings has the makings of a multi-bagger.

Million Hope Industries Holdings does have some risks, we noticed 5 warning signs (and 2 which can't be ignored) we think you should know about.

While Million Hope Industries 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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