What These Trends Mean At Lung Kee (Bermuda) Holdings (HKG:255)

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 indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Lung Kee (Bermuda) Holdings (HKG:255), we weren't too hopeful.

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. 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).

Thus, Lung Kee (Bermuda) Holdings has an ROCE of 7.6%. On its own, that's a low figure but it's around the 8.7% average generated by the Machinery industry.

Check out our latest analysis for Lung Kee (Bermuda) 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 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. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Lung Kee (Bermuda) Holdings to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Lung Kee (Bermuda) Holdings is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 134%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 2 warning signs facing Lung Kee (Bermuda) Holdings that you might find interesting.

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.

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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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