Capital Allocation Trends At Speedy Global Holdings (HKG:540) Aren't Ideal

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Speedy Global Holdings (HKG:540), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

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 Speedy Global Holdings, this is the formula:

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

0.083 = HK$15m ÷ (HK$504m - HK$329m) (Based on the trailing twelve months to June 2020).

Therefore, Speedy Global Holdings has an ROCE of 8.3%. In absolute terms, that's a low return but it's around the Luxury industry average of 8.7%.

See our latest analysis for Speedy Global Holdings

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

How Are Returns Trending?

The trend of returns that Speedy Global Holdings is generating are raising some concerns. The company used to generate 17% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 20% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a separate but related note, it's important to know that Speedy Global Holdings has a current liabilities to total assets ratio of 65%, 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Speedy Global Holdings' ROCE

To see Speedy Global Holdings reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 55% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Speedy Global Holdings does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are concerning...

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. 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.
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