Investors Could Be Concerned With E. Bon Holdings' (HKG:599) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within E. Bon Holdings (HKG:599), we weren't too hopeful.

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. 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)

0.024 = HK$12m ÷ (HK$703m - HK$176m) (Based on the trailing twelve months to March 2021).

So, E. Bon Holdings has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 3.5%.

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're interested in investigating E. Bon Holdings' past further, check out this free graph of 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. To be more specific, the ROCE was 20% 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. 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.

The Bottom Line On E. Bon Holdings' ROCE

In summary, it's unfortunate that E. Bon Holdings is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 38% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 4 warning signs for E. Bon Holdings (1 is potentially serious) you should be aware of.

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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