Investors Could Be Concerned With CSC Holdings' (HKG:235) Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? 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. On that note, looking into CSC Holdings (HKG:235), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on CSC Holdings is:

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

0.033 = HK$75m ÷ (HK$2.3b - HK$38m) (Based on the trailing twelve months to June 2022).

Therefore, CSC Holdings has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 5.4%.

See our latest analysis for CSC Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for CSC Holdings' ROCE against it's prior returns. If you'd like to look at how CSC Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We are a bit anxious about the trends of ROCE at CSC Holdings. Unfortunately, returns have declined substantially over the last five years to the 3.3% we see today. On top of that, the business is utilizing 47% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, CSC Holdings has done well to pay down its current liabilities to 1.6% of total assets. So we could link some of this to the decrease 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.

Our Take On CSC Holdings' ROCE

In summary, it's unfortunate that CSC Holdings is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 51% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

CSC Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

While CSC 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.