Returns On Capital At CSC Holdings (HKG:235) Paint A Concerning Picture

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, CSC Holdings (HKG:235) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for CSC Holdings:

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

0.0056 = HK$13m ÷ (HK$2.3b - HK$36m) (Based on the trailing twelve months to June 2024).

Thus, CSC Holdings has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 6.3%.

See our latest analysis for CSC 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'd like to look at how CSC Holdings has performed in the past in other metrics, you can view this free graph of CSC Holdings' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trend of ROCE at CSC Holdings is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 0.6% we see today. In addition to that, CSC Holdings is now employing 56% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. 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. That could partly explain why the ROCE has dropped. 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.

What We Can Learn From 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 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 final note, we've found 2 warning signs for CSC Holdings that we think you should be aware of.

While CSC 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.