Hope Life International Holdings (HKG:1683) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Hope Life International Holdings (HKG:1683) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Hope Life International Holdings:

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

0.054 = HK$13m ÷ (HK$318m - HK$73m) (Based on the trailing twelve months to December 2021).

Therefore, Hope Life International Holdings has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 9.9%.

View our latest analysis for Hope Life International Holdings

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

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 16% five years ago, while capital employed has grown 50%. That being said, Hope Life International Holdings raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Hope Life International Holdings probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 23%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.4%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Hope Life International Holdings is reinvesting for growth and has higher sales as a result. But since the stock has dived 86% in the last three years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

One final note, you should learn about the 4 warning signs we've spotted with Hope Life International Holdings (including 1 which is concerning) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.