There Are Reasons To Feel Uneasy About PPS International (Holdings)'s (HKG:8201) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating PPS International (Holdings) (HKG:8201), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for PPS International (Holdings), this is the formula:

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

0.025 = HK$5.2m ÷ (HK$286m - HK$82m) (Based on the trailing twelve months to September 2023).

Thus, PPS International (Holdings) has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 7.8%.

View our latest analysis for PPS International (Holdings)

Historical performance is a great place to start when researching a stock so above you can see the gauge for PPS International (Holdings)'s ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of PPS International (Holdings), check out these free graphs here.

What Can We Tell From PPS International (Holdings)'s ROCE Trend?

In terms of PPS International (Holdings)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.0% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, PPS International (Holdings) has done well to pay down its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From PPS International (Holdings)'s 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 PPS International (Holdings). And there could be an opportunity here if other metrics look good too, because the stock has declined 60% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

PPS International (Holdings) does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

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.