Returns On Capital At Helens International Holdings (HKG:9869) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Helens International Holdings (HKG:9869) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Helens International Holdings is:

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

0.059 = CN¥97m ÷ (CN¥1.8b - CN¥149m) (Based on the trailing twelve months to June 2024).

Therefore, Helens International Holdings has an ROCE of 5.9%. On its own, that's a low figure but it's around the 7.1% average generated by the Hospitality industry.

See our latest analysis for Helens International Holdings

Above you can see how the current ROCE for Helens International Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Helens International Holdings .

What Does the ROCE Trend For Helens International Holdings Tell Us?

In terms of Helens International Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 23%, but since then they've fallen to 5.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Helens International Holdings has done well to pay down its current liabilities to 8.2% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Helens International Holdings' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Helens International Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. This could explain why the stock has sunk a total of 80% in the last three years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Helens International Holdings (of which 1 is a bit concerning!) that you should know about.

While Helens 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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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.