Be Wary Of HM International Holdings (HKG:8416) And Its Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into HM International Holdings (HKG:8416), the trends above didn't look too great.

What Is 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. Analysts use this formula to calculate it for HM International Holdings:

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

0.11 = HK$10m ÷ (HK$146m - HK$48m) (Based on the trailing twelve months to June 2022).

Therefore, HM International Holdings has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 8.0% it's much better.

View our latest analysis for HM International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for HM International Holdings' ROCE against it's prior returns. If you're interested in investigating HM International Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

There is reason to be cautious about HM International Holdings, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 19% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect HM International Holdings to turn into a multi-bagger.

Our Take On HM International Holdings' ROCE

In summary, it's unfortunate that HM International Holdings is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 97% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with HM International Holdings (at least 2 which can't be ignored) , and understanding them would certainly be useful.

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.