Here's What's Concerning About Lung Kee (Bermuda) Holdings (HKG:255)

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Lung Kee (Bermuda) Holdings (HKG:255), we weren't too hopeful.

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

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. The formula for this calculation on Lung Kee (Bermuda) Holdings is:

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

0.076 = HK$167m ÷ (HK$2.5b - HK$320m) (Based on the trailing twelve months to June 2020).

So, Lung Kee (Bermuda) Holdings has an ROCE of 7.6%. In absolute terms, that's a low return but it's around the Machinery industry average of 8.8%.

See our latest analysis for Lung Kee (Bermuda) Holdings

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

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Lung Kee (Bermuda) Holdings. About five years ago, returns on capital were 25%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Lung Kee (Bermuda) Holdings becoming one if things continue as they have.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 84% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, Lung Kee (Bermuda) Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While Lung Kee (Bermuda) 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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