RENHENG Enterprise Holdings (HKG:3628) Will Be Looking To Turn Around Its Returns

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into RENHENG Enterprise Holdings (HKG:3628), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for RENHENG Enterprise Holdings, this is the formula:

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

0.0069 = HK$767k ÷ (HK$225m - HK$114m) (Based on the trailing twelve months to June 2023).

Therefore, RENHENG Enterprise Holdings has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 7.1%.

Check out our latest analysis for RENHENG Enterprise 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're interested in investigating RENHENG Enterprise Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is RENHENG Enterprise Holdings' ROCE Trending?

There is reason to be cautious about RENHENG Enterprise Holdings, given the returns are trending downwards. About five years ago, returns on capital were 1.2%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on RENHENG Enterprise Holdings becoming one if things continue as they have.

On a side note, RENHENG Enterprise Holdings' current liabilities have increased over the last five years to 51% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.7%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From RENHENG Enterprise Holdings' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. This could explain why the stock has sunk a total of 79% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 2 warning signs for RENHENG Enterprise Holdings (1 doesn't sit too well with us) you should be aware of.

While RENHENG Enterprise 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.