SEM Holdings (HKG:9929) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think SEM Holdings (HKG:9929) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on SEM Holdings is:

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

0.0092 = MO$2.2m ÷ (MO$273m - MO$35m) (Based on the trailing twelve months to December 2021).

So, SEM Holdings has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Construction industry average of 8.6%.

Check out our latest analysis for SEM 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 SEM Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at SEM Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.9% from 45% 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, SEM Holdings has done well to pay down its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From SEM Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that SEM Holdings is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 13% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

SEM Holdings does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.