The Returns On Capital At Linocraft Holdings (HKG:8383) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Linocraft Holdings (HKG:8383) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Linocraft Holdings is:

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

0.097 = RM14m ÷ (RM290m - RM150m) (Based on the trailing twelve months to February 2021).

So, Linocraft Holdings has an ROCE of 9.7%. On its own, that's a low figure but it's around the 9.3% average generated by the Commercial Services industry.

See our latest analysis for Linocraft Holdings

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

What Can We Tell From Linocraft Holdings' ROCE Trend?

On the surface, the trend of ROCE at Linocraft Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.7% from 28% five years ago. However it looks like Linocraft Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Linocraft Holdings has decreased its current liabilities to 52% 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. Keep in mind 52% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

To conclude, we've found that Linocraft Holdings is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 63% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we found 4 warning signs for Linocraft Holdings (1 can't be ignored) you should be aware of.

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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