Investors Could Be Concerned With Okura Holdings' (HKG:1655) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even 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. So after we looked into Okura Holdings (HKG:1655), the trends above didn't look too great.

Understanding 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. To calculate this metric for Okura Holdings, this is the formula:

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

0.039 = JP¥603m ÷ (JP¥18b - JP¥3.1b) (Based on the trailing twelve months to December 2022).

Therefore, Okura Holdings has an ROCE of 3.9%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 2.9%.

View our latest analysis for Okura Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Okura Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Okura Holdings, check out these free graphs here.

What Does the ROCE Trend For Okura Holdings Tell Us?

In terms of Okura Holdings' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 5.0% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Okura Holdings becoming one if things continue as they have.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Unsurprisingly then, the stock has dived 80% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Okura Holdings, we've spotted 3 warning signs, and 2 of them are a bit concerning.

While Okura 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.