Returns On Capital At Four Seas Mercantile Holdings (HKG:374) Paint An Interesting Picture

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Four Seas Mercantile Holdings (HKG:374) and its ROCE trend, we weren't exactly thrilled.

What is 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).

Thus, 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 14%.

See 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 The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Four Seas Mercantile Holdings doesn't inspire 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Four Seas Mercantile Holdings has a high ratio of current liabilities to total assets of 46%. 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.

In Conclusion...

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 24% 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.

Four Seas Mercantile Holdings does have some risks, we noticed 3 warning signs (and 2 which are potentially serious) we think you should know about.

While Four Seas Mercantile Holdings 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. 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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