Investors Will Want Hing Lee (HK) Holdings' (HKG:396) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Hing Lee (HK) Holdings (HKG:396) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Hing Lee (HK) Holdings:

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

0.049 = HK$6.0m ÷ (HK$211m - HK$88m) (Based on the trailing twelve months to June 2023).

Therefore, Hing Lee (HK) Holdings has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 7.0%.

Check out our latest analysis for Hing Lee (HK) Holdings

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

How Are Returns Trending?

Like most people, we're pleased that Hing Lee (HK) Holdings is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 4.9% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 70% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.

On a separate but related note, it's important to know that Hing Lee (HK) Holdings has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Hing Lee (HK) Holdings' ROCE

In a nutshell, we're pleased to see that Hing Lee (HK) Holdings has been able to generate higher returns from less capital. And since the stock has dived 78% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

On a final note, we found 2 warning signs for Hing Lee (HK) Holdings (1 is concerning) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.