Some Investors May Be Worried About Man King Holdings' (HKG:2193) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Man King Holdings (HKG:2193), the trends above didn't look too great.

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

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 Man King Holdings, this is the formula:

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

0.009 = HK$2.3m ÷ (HK$316m - HK$62m) (Based on the trailing twelve months to March 2021).

So, Man King Holdings has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.2%.

View our latest analysis for Man King Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Man King Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Man King Holdings, check out these free graphs here.

So How Is Man King Holdings' ROCE Trending?

We are a bit worried about the trend of returns on capital at Man King Holdings. About five years ago, returns on capital were 16%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. If these trends continue, we wouldn't expect Man King Holdings to turn into a multi-bagger.

The Bottom Line On Man King Holdings' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Unsurprisingly then, the stock has dived 71% over the last five years, so investors are recognizing these changes and don't like the company's prospects. 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 Man King Holdings we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Man King 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. 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.
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