Coolpoint Innonism Holding (HKG:8040) Has Some Difficulty Using Its Capital Effectively

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 to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Coolpoint Innonism Holding (HKG:8040), we weren't too hopeful.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Coolpoint Innonism Holding is:

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

0.019 = HK$1.6m ÷ (HK$144m - HK$59m) (Based on the trailing twelve months to June 2023).

Therefore, Coolpoint Innonism Holding has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.5%.

View our latest analysis for Coolpoint Innonism Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Coolpoint Innonism Holding's ROCE against it's prior returns. If you'd like to look at how Coolpoint Innonism Holding has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Coolpoint Innonism Holding's ROCE Trend?

There is reason to be cautious about Coolpoint Innonism Holding, given the returns are trending downwards. To be more specific, the ROCE was 26% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Coolpoint Innonism Holding becoming one if things continue as they have.

On a separate but related note, it's important to know that Coolpoint Innonism Holding has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, it's unfortunate that Coolpoint Innonism Holding is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 53% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing: We've identified 3 warning signs with Coolpoint Innonism Holding (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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.

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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.