When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Suga International Holdings (HKG:912), so let's see why.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Suga International Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.066 = HK$48m ÷ (HK$1.2b - HK$453m) (Based on the trailing twelve months to September 2020).
Therefore, Suga International Holdings has an ROCE of 6.6%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 16%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Suga International Holdings' ROCE against it's prior returns. If you'd like to look at how Suga International Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We are a bit worried about the trend of returns on capital at Suga International Holdings. Unfortunately the returns on capital have diminished from the 9.5% 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 Suga International Holdings to turn into a multi-bagger.
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 18% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
One more thing: We've identified 4 warning signs with Suga International Holdings (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.
While Suga International Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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