Here's What's Concerning About Lai Si Enterprise Holding's (HKG:2266) Returns On Capital

When researching a stock for investment, what can tell us that the company is 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. Having said that, after a brief look, Lai Si Enterprise Holding (HKG:2266) we aren't filled with optimism, but let's investigate further.

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. Analysts use this formula to calculate it for Lai Si Enterprise Holding:

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

0.08 = MO$10m ÷ (MO$212m - MO$85m) (Based on the trailing twelve months to December 2022).

So, Lai Si Enterprise Holding has an ROCE of 8.0%. On its own, that's a low figure but it's around the 6.9% average generated by the Construction industry.

Check out our latest analysis for Lai Si Enterprise Holding

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 Lai Si Enterprise Holding, check out these free graphs here.

SWOT Analysis for Lai Si Enterprise Holding

What Can We Tell From Lai Si Enterprise Holding's ROCE Trend?

The trend of returns that Lai Si Enterprise Holding is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 8.0% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 35% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Lai Si Enterprise Holding's current liabilities are still rather high at 40% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Lai Si Enterprise Holding's ROCE

To see Lai Si Enterprise Holding reducing the capital employed in the business in tandem with diminishing returns, is concerning. It should come as no surprise then that the stock has fallen 38% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 3 warning signs for Lai Si Enterprise Holding you'll probably want to know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.