S&P International Holding (HKG:1695) Has Some Difficulty Using Its Capital Effectively

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, S&P International Holding (HKG:1695) we aren't filled with optimism, but let's investigate further.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for S&P International Holding, this is the formula:

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

0.013 = RM1.7m ÷ (RM164m - RM29m) (Based on the trailing twelve months to June 2023).

So, S&P International Holding has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.3%.

View our latest analysis for S&P International Holding

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

The Trend Of ROCE

In terms of S&P International Holding's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 15% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 S&P International Holding to turn into a multi-bagger.

On a side note, S&P International Holding's current liabilities have increased over the last five years to 18% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.3%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line

In summary, it's unfortunate that S&P International Holding is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 73% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching S&P International Holding, you might be interested to know about the 2 warning signs that our analysis has discovered.

While S&P International 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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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.