Returns On Capital Signal Tricky Times Ahead For SEM Holdings (HKG:9929)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at SEM Holdings (HKG:9929) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on SEM Holdings is:

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

0.025 = MO$5.7m ÷ (MO$277m - MO$46m) (Based on the trailing twelve months to December 2022).

Thus, SEM Holdings has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.9%.

Check out our latest analysis for SEM Holdings

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

What Can We Tell From SEM Holdings' ROCE Trend?

On the surface, the trend of ROCE at SEM Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.5% from 44% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On SEM Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for SEM Holdings. These growth trends haven't led to growth returns though, since the stock has fallen 34% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 2 warning signs we've spotted with SEM Holdings (including 1 which is a bit concerning) .

While SEM 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.