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

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at HM International Holdings (HKG:8416), so let's see why.

Return On Capital Employed (ROCE): What Is It?

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 September 2022).

So, HM International Holdings has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Commercial Services industry.

Check out 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 want to delve into the historical earnings, revenue and cash flow of HM International Holdings, check out these free graphs here.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at HM International Holdings. About five years ago, returns on capital were 18%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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.

The Bottom Line

In summary, it's unfortunate that HM International Holdings is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 85% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for HM International Holdings (of which 3 are concerning!) that you should know about.

While HM International 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.