Returns On Capital Signal Tricky Times Ahead For Clifford Modern Living Holdings (HKG:3686)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Clifford Modern Living Holdings (HKG:3686), we don't think it's current trends fit the mold of a multi-bagger.

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 Clifford Modern Living Holdings is:

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

0.14 = CN¥105m ÷ (CN¥876m - CN¥146m) (Based on the trailing twelve months to June 2023).

Therefore, Clifford Modern Living Holdings has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 3.3% generated by the Industrials industry.

See 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're interested in investigating Clifford Modern Living Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

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

When we looked at the ROCE trend at Clifford Modern Living Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 36% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Clifford Modern Living Holdings has decreased its current liabilities to 17% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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

We're a bit apprehensive about Clifford Modern Living Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 3.0% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a separate note, we've found 2 warning signs for Clifford Modern Living Holdings you'll probably want to know about.

While Clifford Modern Living 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.