Capital Allocation Trends At Hing Ming Holdings (HKG:8425) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Hing Ming Holdings (HKG:8425), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Hing Ming Holdings, this is the formula:

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

0.019 = HK$2.7m ÷ (HK$179m - HK$32m) (Based on the trailing twelve months to June 2022).

Therefore, Hing Ming Holdings has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 3.8%.

View our latest analysis for Hing Ming Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Hing Ming Holdings, check out these free graphs here.

How Are Returns Trending?

On the surface, the trend of ROCE at Hing Ming Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.9% from 14% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hing Ming Holdings. And there could be an opportunity here if other metrics look good too, because the stock has declined 59% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Hing Ming Holdings, we've spotted 4 warning signs, and 1 of them is concerning.

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.