Returns On Capital At Clifford Modern Living Holdings (HKG:3686) Paint An Interesting Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Looking at Clifford Modern Living Holdings (HKG:3686), it does have a high ROCE right now, but lets see how returns are trending.

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. Analysts use this formula to calculate it for Clifford Modern Living Holdings:

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

0.26 = CN¥114m ÷ (CN¥621m - CN¥176m) (Based on the trailing twelve months to June 2020).

Thus, Clifford Modern Living Holdings has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Industrials industry average of 4.2%.

Check out our latest analysis for Clifford Modern Living Holdings

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

What Can We Tell From Clifford Modern Living Holdings' ROCE Trend?

On the surface, the trend of ROCE at Clifford Modern Living Holdings doesn't inspire confidence. Historically returns on capital were even higher at 54%, but they have dropped over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Clifford Modern Living Holdings has decreased its current liabilities to 28% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Clifford Modern Living Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Clifford Modern Living Holdings is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing to note, we've identified 2 warning signs with Clifford Modern Living Holdings and understanding these should be part of your investment process.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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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