These Metrics Don't Make High Fashion International (HKG:608) Look Too Strong

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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into High Fashion International (HKG:608), the trends above didn't look too great.

What is 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 High Fashion International is:

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

0.00001 = HK$46k ÷ (HK$4.9b - HK$1.8b) (Based on the trailing twelve months to June 2020).

Thus, High Fashion International has an ROCE of 0.001%. Ultimately, that's a low return and it under-performs the Luxury industry average of 9.2%.

View our latest analysis for High Fashion International

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

What Can We Tell From High Fashion International's ROCE Trend?

In terms of High Fashion International's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 0.8% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 High Fashion International to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that High Fashion International is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 25% 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.

On a final note, we found 5 warning signs for High Fashion International (2 are concerning) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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