Returns On Capital Signal Difficult Times Ahead For HM International Holdings (HKG:8416)

What underlying fundamental trends can indicate that a company might be in decline? 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. 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)

0.032 = HK$3.0m ÷ (HK$133m - HK$38m) (Based on the trailing twelve months to March 2023).

So, HM International Holdings has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 7.5%.

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'd like to look at how HM International Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at HM International Holdings. Unfortunately the returns on capital have diminished from the 11% 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.

What We Can Learn From HM International Holdings' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. We expect this has contributed to the stock plummeting 72% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 5 warning signs with HM International Holdings (at least 2 which don't sit too well with us) , and understanding these would certainly be useful.

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.