Four Seas Mercantile Holdings (HKG:374) Will Be Hoping To Turn Its Returns On Capital Around

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Four Seas Mercantile Holdings (HKG:374) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Four Seas Mercantile Holdings:

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

0.0015 = HK$3.2m ÷ (HK$3.8b - HK$1.8b) (Based on the trailing twelve months to September 2020).

Therefore, Four Seas Mercantile Holdings has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Food industry average of 13%.

View our latest analysis for Four Seas Mercantile Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Four Seas Mercantile Holdings' ROCE against it's prior returns. If you'd like to look at how Four Seas Mercantile Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Four Seas Mercantile Holdings Tell Us?

When we looked at the ROCE trend at Four Seas Mercantile Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 9.4%, but since then they've fallen to 0.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Four Seas Mercantile Holdings has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Four Seas Mercantile Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Four Seas Mercantile Holdings. These trends are starting to be recognized by investors since the stock has delivered a 8.6% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we found 3 warning signs for Four Seas Mercantile Holdings (2 are potentially serious) you should be aware of.

While Four Seas Mercantile 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. 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.
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