The Returns On Capital At Beng Soon Machinery Holdings (HKG:1987) Don't Inspire Confidence

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Beng Soon Machinery Holdings (HKG:1987), the trends above didn't look too great.

What Is 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. To calculate this metric for Beng Soon Machinery Holdings, this is the formula:

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

0.057 = S$2.8m ÷ (S$55m - S$6.2m) (Based on the trailing twelve months to June 2022).

So, Beng Soon Machinery Holdings has an ROCE of 5.7%. In absolute terms, that's a low return but it's around the Construction industry average of 7.0%.

Check out the opportunities and risks within the HK Construction industry.

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're interested in investigating Beng Soon Machinery Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Beng Soon Machinery Holdings Tell Us?

In terms of Beng Soon Machinery Holdings' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 14%, however they're now substantially lower than that as we saw above. 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. 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.

In Conclusion...

In summary, it's unfortunate that Beng Soon Machinery Holdings is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last three years have experienced a 57% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Beng Soon Machinery Holdings does have some risks though, and we've spotted 2 warning signs for Beng Soon Machinery Holdings that you might be interested in.

While Beng Soon Machinery 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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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.