Matrix Holdings Limited (HKG:1005): Why Return On Capital Employed Is Important

I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Matrix Holdings Limited (HKG:1005).

Purchasing Matrix Holdings gives you an ownership stake in the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Thus, to understand how your money can grow by investing in Matrix Holdings, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

Check out our latest analysis for Matrix Holdings

Calculating Return On Capital Employed for 1005

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. To determine Matrix Holdings’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). Take a look at the formula box beneath:

ROCE Calculation for 1005

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = HK$122.59m ÷ (HK$1.31b – HK$277.12m) = 11.90%

1005’s 11.90% ROCE means that for every HK$100 you invest, the company creates HK$11.9. A good ROCE hurdle you should aim for in your investments is 15%, which 1005 has just fallen short of, meaning the company creates an unideal amount of earnings from capital employed.

SEHK:1005 Last Perf July 13th 18
SEHK:1005 Last Perf July 13th 18

A deeper look

Matrix Holdings’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Matrix Holdings is in an adverse position, but this can change if these factors improve. Because of this, it is important to look beyond the final value of 1005’s ROCE and understand what is happening to the individual components. Looking three years in the past, it is evident that 1005’s ROCE has deteriorated from 18.45%, indicating the company’s capital returns have declined. The movement in the earnings variable over this time shows a fall from HK$125.08m to HK$122.59m whilst capital employed has increased due to a hike in the level of total assets employed , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.

Next Steps

Matrix Holdings’s ROCE has decreased in the recent past and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and management ability. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate 1005 or move on to other alternatives.

  1. Future Outlook: What are well-informed industry analysts predicting for 1005’s future growth? Take a look at our free research report of analyst consensus for 1005’s outlook.
  2. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Matrix Holdings’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.