Returns On Capital At Cool Link (Holdings) (HKG:8491) Paint A Concerning Picture

When researching a stock for investment, what can tell us that the company is in decline? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Cool Link (Holdings) (HKG:8491), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Cool Link (Holdings):

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

0.016 = S$329k ÷ (S$32m - S$11m) (Based on the trailing twelve months to March 2023).

Therefore, Cool Link (Holdings) has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 9.4%.

See our latest analysis for Cool Link (Holdings)

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

SWOT Analysis for Cool Link (Holdings)

The Trend Of ROCE

In terms of Cool Link (Holdings)'s historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 4.1% five years ago, but since then it has dropped noticeably. 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. If these trends continue, we wouldn't expect Cool Link (Holdings) to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 34%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.6%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On Cool Link (Holdings)'s ROCE

In summary, it's unfortunate that Cool Link (Holdings) is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 95% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Cool Link (Holdings) (of which 2 are potentially serious!) that you should know about.

While Cool Link (Holdings) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.