Pacific Textiles Holdings (HKG:1382) Could Be Struggling To Allocate Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Pacific Textiles Holdings (HKG:1382), the trends above didn't look too great.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Pacific Textiles Holdings, this is the formula:

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

0.22 = HK$754m ÷ (HK$5.2b - HK$1.7b) (Based on the trailing twelve months to September 2020).

So, Pacific Textiles Holdings has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Luxury industry average of 8.8%.

Check out our latest analysis for Pacific Textiles Holdings

In the above chart we have measured Pacific Textiles Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Pacific Textiles Holdings.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Pacific Textiles Holdings. Unfortunately the returns on capital have diminished from the 32% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Pacific Textiles Holdings to turn into a multi-bagger.

Our Take On Pacific Textiles Holdings' ROCE

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 32% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a separate note, we've found 1 warning sign for Pacific Textiles Holdings you'll probably want to know about.

Pacific Textiles Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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