Be Wary Of Sun Hing Vision Group Holdings (HKG:125) And Its Returns On Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Sun Hing Vision Group Holdings (HKG:125), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

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 Sun Hing Vision Group Holdings is:

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

0.006 = HK$4.8m ÷ (HK$1.0b - HK$242m) (Based on the trailing twelve months to March 2022).

Thus, Sun Hing Vision Group Holdings has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.

Check out our latest analysis for Sun Hing Vision Group Holdings

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

What Does the ROCE Trend For Sun Hing Vision Group Holdings Tell Us?

We are a bit worried about the trend of returns on capital at Sun Hing Vision Group Holdings. To be more specific, the ROCE was 9.9% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Sun Hing Vision Group Holdings becoming one if things continue as they have.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 66% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Sun Hing Vision Group Holdings, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While Sun Hing Vision Group 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.