Be Wary Of Sam Woo Construction Group (HKG:3822) And Its Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Sam Woo Construction Group (HKG:3822), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Sam Woo Construction Group is:

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

0.041 = HK$28m ÷ (HK$812m - HK$126m) (Based on the trailing twelve months to September 2020).

Therefore, Sam Woo Construction Group has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

See our latest analysis for Sam Woo Construction Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sam Woo Construction Group's ROCE against it's prior returns. If you're interested in investigating Sam Woo Construction Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Sam Woo Construction Group's ROCE Trend?

There is reason to be cautious about Sam Woo Construction Group, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 28% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Sam Woo Construction Group to turn into a multi-bagger.

On a related note, Sam Woo Construction Group has decreased its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. 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 Sam Woo Construction Group's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 67% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Sam Woo Construction Group we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.

While Sam Woo Construction Group 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. 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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