Is Royal Deluxe Holdings (HKG:3789) Likely To Turn Things Around?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Royal Deluxe Holdings (HKG:3789) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Royal Deluxe Holdings is:

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

0.098 = HK$24m ÷ (HK$435m - HK$186m) (Based on the trailing twelve months to March 2020).

Thus, Royal Deluxe Holdings has an ROCE of 9.8%. On its own, that's a low figure but it's around the 11% average generated by the Construction industry.

See our latest analysis for Royal Deluxe Holdings

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

What Can We Tell From Royal Deluxe Holdings' ROCE Trend?

In terms of Royal Deluxe Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 42% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Royal Deluxe Holdings has done well to pay down its current liabilities to 43% of total assets. So we could link some of this to the decrease in ROCE. 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. Keep in mind 43% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Royal Deluxe Holdings. These growth trends haven't led to growth returns though, since the stock has fallen 59% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Royal Deluxe Holdings, we've spotted 5 warning signs, and 2 of them make us uncomfortable.

While Royal Deluxe 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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