The Returns On Capital At Sam Woo Construction Group (HKG:3822) Don't Inspire Confidence

What financial metrics can indicate to us that a company is maturing or even in decline? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Sam Woo Construction Group (HKG:3822), we weren't too hopeful.

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 Sam Woo Construction Group, this is the formula:

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).

So, 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 9.1%.

Check out 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 Does the ROCE Trend For Sam Woo Construction Group Tell Us?

We are a bit worried about the trend of returns on capital at Sam Woo Construction Group. To be more specific, the ROCE was 28% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

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. We expect this has contributed to the stock plummeting 71% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Sam Woo Construction Group does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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