The Returns On Capital At Ming Fai International Holdings (HKG:3828) Don't Inspire Confidence

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Ming Fai International Holdings (HKG:3828), so let's see why.

What is 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 Ming Fai International Holdings is:

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

0.02 = HK$24m ÷ (HK$1.7b - HK$499m) (Based on the trailing twelve months to June 2021).

Thus, Ming Fai International Holdings has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 12%.

Check out our latest analysis for Ming Fai International Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Ming Fai International Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Ming Fai International Holdings. Unfortunately the returns on capital have diminished from the 9.5% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Ming Fai International Holdings becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Ming Fai International Holdings is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 63% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a separate note, we've found 2 warning signs for Ming Fai International Holdings you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.