Capital Allocation Trends At REF Holdings (HKG:1631) Aren't Ideal

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at REF Holdings (HKG:1631), we've spotted some signs that it could be struggling, so let's investigate.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for REF Holdings:

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

0.071 = HK$7.0m ÷ (HK$127m - HK$28m) (Based on the trailing twelve months to June 2025).

Thus, REF Holdings has an ROCE of 7.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.1%.

Check out our latest analysis for REF 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'd like to look at how REF Holdings has performed in the past in other metrics, you can view this free graph of REF Holdings' past earnings, revenue and cash flow.

What Can We Tell From REF Holdings' ROCE Trend?

We are a bit anxious about the trends of ROCE at REF Holdings. To be more specific, today's ROCE was 13% five years ago but has since fallen to 7.1%. On top of that, the business is utilizing 61% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Yet despite these poor fundamentals, the stock has gained a huge 156% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

REF Holdings does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

While REF Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.