Returns On Capital At Ngai Hing Hong (HKG:1047) 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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Ngai Hing Hong (HKG:1047) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Ngai Hing Hong:

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

0.048 = HK$24m ÷ (HK$995m - HK$494m) (Based on the trailing twelve months to June 2020).

Therefore, Ngai Hing Hong has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 11%.

See our latest analysis for Ngai Hing Hong

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 want to delve into the historical earnings, revenue and cash flow of Ngai Hing Hong, check out these free graphs here.

What Can We Tell From Ngai Hing Hong's ROCE Trend?

Things have been pretty stable at Ngai Hing Hong, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Ngai Hing Hong doesn't end up being a multi-bagger in a few years time.

On a separate but related note, it's important to know that Ngai Hing Hong has a current liabilities to total assets ratio of 50%, 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

We can conclude that in regards to Ngai Hing Hong's returns on capital employed and the trends, there isn't much change to report on. Since the stock has declined 18% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Ngai Hing Hong does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

While Ngai Hing Hong 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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