Returns At Hing Lee (HK) Holdings (HKG:396) Are On The Way Up

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. With that in mind, we've noticed some promising trends at Hing Lee (HK) Holdings (HKG:396) so let's look a bit deeper.

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 Hing Lee (HK) Holdings is:

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 7.7%.

See our latest analysis for Hing Lee (HK) Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Hing Lee (HK) Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Hing Lee (HK) Holdings is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 4.9% on their capital employed. 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 effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

From what we've seen above, Hing Lee (HK) Holdings has managed to increase it's returns on capital all the while reducing it's capital base. However the stock is down a substantial 75% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

One more thing to note, we've identified 2 warning signs with Hing Lee (HK) Holdings and understanding these should be part of your investment process.

While Hing Lee (HK) 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.