Coolpoint Innonism Holding (HKG:8040) 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? More often than not, we'll see a declining return on capital employed (ROCE) and a declining 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. In light of that, from a first glance at Coolpoint Innonism Holding (HKG:8040), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for Coolpoint Innonism Holding:

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

0.061 = HK$5.0m ÷ (HK$161m - HK$80m) (Based on the trailing twelve months to September 2023).

So, Coolpoint Innonism Holding has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.8%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Coolpoint Innonism Holding.

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

We are a bit worried about the trend of returns on capital at Coolpoint Innonism Holding. Unfortunately the returns on capital have diminished from the 25% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. If these trends continue, we wouldn't expect Coolpoint Innonism Holding to turn into a multi-bagger.

On a side note, Coolpoint Innonism Holding's current liabilities are still rather high at 49% of total assets. 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 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. Since the stock has skyrocketed 160% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Coolpoint Innonism Holding, we've spotted 3 warning signs, and 2 of them are potentially serious.

While Coolpoint Innonism Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.