E. Bon Holdings (HKG:599) Will Be Looking To Turn Around Its Returns

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into E. Bon Holdings (HKG:599), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on E. Bon Holdings is:

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

0.017 = HK$8.9m ÷ (HK$765m - HK$229m) (Based on the trailing twelve months to September 2023).

Thus, E. Bon Holdings has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 4.5%.

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'd like to look at how E. Bon Holdings has performed in the past in other metrics, you can view this free graph of E. Bon Holdings' past earnings, revenue and cash flow.

So How Is E. Bon Holdings' ROCE Trending?

We are a bit worried about the trend of returns on capital at E. Bon Holdings. About five years ago, returns on capital were 8.2%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on E. Bon Holdings becoming one if things continue as they have.

What We Can Learn From E. Bon Holdings' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 66% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 4 warning signs with E. Bon Holdings (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

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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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.