Carpenter Tan Holdings (HKG:837) Could Be Struggling To Allocate Capital

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Carpenter Tan Holdings (HKG:837), we've spotted some signs that it could be struggling, so let's investigate.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Carpenter Tan Holdings is:

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

0.13 = CN¥82m ÷ (CN¥734m - CN¥87m) (Based on the trailing twelve months to December 2020).

Thus, Carpenter Tan Holdings has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 7.4% it's much better.

View our latest analysis for Carpenter Tan 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 Carpenter Tan Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Carpenter Tan Holdings' ROCE Trend?

We are a bit worried about the trend of returns on capital at Carpenter Tan Holdings. About five years ago, returns on capital were 19%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Carpenter Tan Holdings becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Carpenter Tan Holdings is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 63% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing Carpenter Tan Holdings we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

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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