Investors Could Be Concerned With EVA Precision Industrial Holdings' (HKG:838) Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within EVA Precision Industrial Holdings (HKG:838), 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. Analysts use this formula to calculate it for EVA Precision Industrial Holdings:

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

0.024 = HK$80m ÷ (HK$6.1b - HK$2.8b) (Based on the trailing twelve months to December 2020).

Thus, EVA Precision Industrial Holdings has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.1%.

Check out our latest analysis for EVA Precision Industrial Holdings

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

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at EVA Precision Industrial Holdings. About five years ago, returns on capital were 7.8%, 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. If these trends continue, we wouldn't expect EVA Precision Industrial Holdings to turn into a multi-bagger.

Another thing to note, EVA Precision Industrial Holdings has a high ratio of current liabilities to total assets of 45%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On EVA Precision Industrial Holdings' ROCE

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. In spite of that, the stock has delivered a 9.2% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to continue researching EVA Precision Industrial Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.

While EVA Precision Industrial Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.
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