Returns On Capital Signal Difficult Times Ahead For Beng Soon Machinery Holdings (HKG:1987)

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. And from a first read, things don't look too good at Beng Soon Machinery Holdings (HKG:1987), so let's see why.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Beng Soon Machinery Holdings:

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

0.033 = S$1.6m ÷ (S$50m - S$2.9m) (Based on the trailing twelve months to June 2024).

Therefore, Beng Soon Machinery Holdings has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.9%.

See our latest analysis for Beng Soon Machinery 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 , check out these free graphs detailing revenue and cash flow performance of Beng Soon Machinery Holdings.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Beng Soon Machinery Holdings. To be more specific, the ROCE was 9.3% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Beng Soon Machinery Holdings becoming one if things continue as they have.

On a side note, Beng Soon Machinery Holdings has done well to pay down its current liabilities to 5.7% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Bottom Line On Beng Soon Machinery Holdings' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 66% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Beng Soon Machinery Holdings does have some risks though, and we've spotted 1 warning sign for Beng Soon Machinery Holdings that you might be interested in.

While Beng Soon Machinery 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.

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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.