Le Saunda Holdings (HKG:738) Could Be Struggling To Allocate Capital

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 Le Saunda Holdings (HKG:738), the trends above didn't look too great.

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 Le Saunda Holdings is:

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

0.015 = CN¥15m ÷ (CN¥1.2b - CN¥112m) (Based on the trailing twelve months to February 2021).

Thus, Le Saunda Holdings has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 7.0%.

View our latest analysis for Le Saunda Holdings

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

The Trend Of ROCE

The trend of returns that Le Saunda Holdings is generating are raising some concerns. To be more specific, today's ROCE was 13% five years ago but has since fallen to 1.5%. In addition to that, Le Saunda Holdings is now employing 23% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line

In summary, it's unfortunate that Le Saunda Holdings is shrinking its capital base and also generating lower returns. Despite the concerning underlying trends, the stock has actually gained 29% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One final note, you should learn about the 5 warning signs we've spotted with Le Saunda Holdings (including 1 which doesn't sit too well with us) .

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. 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.
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