These Return Metrics Don't Make Kam Hing International Holdings (HKG:2307) Look Too Strong

What financial metrics can indicate to us that a company is maturing or even 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Kam Hing International Holdings (HKG:2307), we weren't too hopeful.

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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. The formula for this calculation on Kam Hing International Holdings is:

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

0.0057 = HK$11m ÷ (HK$3.4b - HK$1.5b) (Based on the trailing twelve months to December 2024).

Therefore, Kam Hing International Holdings has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 12%.

View our latest analysis for Kam Hing International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kam Hing International Holdings' ROCE against it's prior returns. If you'd like to look at how Kam Hing International Holdings has performed in the past in other metrics, you can view this free graph of Kam Hing International Holdings' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trend of returns that Kam Hing International Holdings is generating are raising some concerns. The company used to generate 3.5% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 42% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Kam Hing International Holdings' current liabilities have increased over the last five years to 43% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Kam Hing International Holdings' ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Investors haven't taken kindly to these developments, since the stock has declined 54% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Kam Hing International Holdings does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Kam Hing International Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.