Southeast Asia Properties & Finance Limited (HKG:252): Assessing Capital Returns

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and looking to gauge the potential return on investment in Southeast Asia Properties & Finance Limited (HKG:252).

Buying Southeast Asia Properties & Finance makes you a partial owner of the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. To understand Southeast Asia Properties & Finance’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

See our latest analysis for Southeast Asia Properties & Finance

Southeast Asia Properties & Finance's Return On Capital Employed

Choosing to invest in Southeast Asia Properties & Finance comes at the cost of investing in another potentially favourable company. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business' ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We'll look at Southeast Asia Properties & Finance’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. I have calculated Southeast Asia Properties & Finance’s ROCE for you below:

As you can see, 252 earned HK$2.2 from every HK$100 you invested over the previous twelve months. This makes Southeast Asia Properties & Finance disappointing when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital may be able to compound over time, but not to standard that investors should be aiming for.

Then why have investors invested?

Although Southeast Asia Properties & Finance is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Three years ago, 252’s ROCE was 2.3%, which means the company's capital returns have worsened. Conversely, the movement in the earnings variable shows a jump from HK$28.8m to HK$32.9m albeit capital employed rose by a relatively larger volume as a result of a rise in total assets and decrease in current liabilities (less borrowed money) , indicating that the previous growth in earnings has not been able to improve ROCE because the company now needs to employ more capital to operate the business.

Next Steps

Southeast Asia Properties & Finance’s ROCE has decreased in the recent past and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation. If you're interested in diving deeper, take a look at what I've linked below for further information on these fundamentals and other potential investment opportunities.

1. Future Outlook: What are well-informed industry analysts predicting for 252’s future growth? Take a look at our free research report of analyst consensus for 252’s outlook.
2. Valuation: What is 252 worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether 252 is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.