Deep Source Holdings (HKG:990) May Have Issues Allocating Its Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Deep Source Holdings (HKG:990), it didn't seem to tick all of these boxes.

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Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Deep Source Holdings:

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

0.068 = HK$548m ÷ (HK$20b - HK$12b) (Based on the trailing twelve months to June 2025).

So, Deep Source Holdings has an ROCE of 6.8%. In absolute terms, that's a low return but it's around the Trade Distributors industry average of 6.2%.

View our latest analysis for Deep Source Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Deep Source Holdings' ROCE against it's prior returns. If you're interested in investigating Deep Source Holdings' past further, check out this free graph covering Deep Source Holdings' past earnings, revenue and cash flow.

What Can We Tell From Deep Source Holdings' ROCE Trend?

We weren't thrilled with the trend because Deep Source Holdings' ROCE has reduced by 71% over the last five years, while the business employed 443% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Deep Source Holdings probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a separate but related note, it's important to know that Deep Source Holdings has a current liabilities to total assets ratio of 59%, 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In summary, we're somewhat concerned by Deep Source Holdings' diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 774% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Deep Source Holdings (including 1 which is potentially serious) .

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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.