These Return Metrics Don't Make REF Holdings (HKG:1631) Look Too Strong

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at REF Holdings (HKG:1631), so let's see why.

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. Analysts use this formula to calculate it for REF Holdings:

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

0.11 = HK$11m ÷ (HK$148m - HK$40m) (Based on the trailing twelve months to December 2022).

So, REF Holdings has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 7.5% it's much better.

See our latest analysis for REF Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for REF Holdings' ROCE against it's prior returns. 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 past earnings, revenue and cash flow.

The Trend Of ROCE

We are a bit anxious about the trends of ROCE at REF Holdings. Unfortunately, returns have declined substantially over the last five years to the 11% we see today. On top of that, the business is utilizing 37% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line On REF Holdings' ROCE

In summary, it's unfortunate that REF Holdings is shrinking its capital base and also generating lower returns. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching REF Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.

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.