E. Bon Holdings' (HKG:599) Returns On Capital Tell Us There Is Reason To Feel Uneasy

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. 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 E. Bon Holdings (HKG:599), we weren't too hopeful.

What Is 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. Analysts use this formula to calculate it for E. Bon Holdings:

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

0.033 = HK$18m ÷ (HK$711m - HK$177m) (Based on the trailing twelve months to March 2024).

So, E. Bon Holdings has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 6.3%.

Check out our latest analysis for E. Bon Holdings

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

What Does the ROCE Trend For E. Bon Holdings Tell Us?

We are a bit worried about the trend of returns on capital at E. Bon Holdings. Unfortunately the returns on capital have diminished from the 4.6% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect E. Bon Holdings to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that E. Bon Holdings is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 52% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about E. Bon Holdings, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.

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