There Are Reasons To Feel Uneasy About Matrix Holdings' (HKG:1005) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Matrix Holdings (HKG:1005), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Matrix Holdings is:

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

0.069 = HK$83m ÷ (HK$1.4b - HK$227m) (Based on the trailing twelve months to December 2021).

So, Matrix Holdings has an ROCE of 6.9%. On its own that's a low return, but compared to the average of 4.2% generated by the Leisure industry, it's much better.

Check out our latest analysis for Matrix Holdings

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

What Can We Tell From Matrix Holdings' ROCE Trend?

On the surface, the trend of ROCE at Matrix Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.9% from 14% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Matrix Holdings' ROCE

While returns have fallen for Matrix Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 26% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing, we've spotted 1 warning sign facing Matrix Holdings that you might find interesting.

While Matrix 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.