Hilong Holding (HKG:1623) May Have Issues Allocating Its Capital

By
Simply Wall St
Published
March 18, 2022
SEHK:1623
Source: Shutterstock

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Hilong Holding (HKG:1623), we've spotted some signs that it could be struggling, so let's investigate.

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. The formula for this calculation on Hilong Holding is:

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

0.024 = CN¥135m ÷ (CN¥7.2b - CN¥1.6b) (Based on the trailing twelve months to June 2021).

Thus, Hilong Holding has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 4.1%.

See our latest analysis for Hilong Holding

roce
SEHK:1623 Return on Capital Employed March 18th 2022

Above you can see how the current ROCE for Hilong Holding 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 report on analyst forecasts for the company.

What Does the ROCE Trend For Hilong Holding Tell Us?

We are a bit worried about the trend of returns on capital at Hilong Holding. Unfortunately the returns on capital have diminished from the 5.5% that they were earning five years ago. 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 Hilong Holding to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Unsurprisingly then, the stock has dived 84% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Hilong Holding, we've spotted 2 warning signs, and 1 of them is a bit concerning.

While Hilong Holding 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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