Here's What's Concerning About Luks Group (Vietnam Holdings) (HKG:366)

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Luks Group (Vietnam Holdings) (HKG:366) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Luks Group (Vietnam Holdings) is:

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

0.026 = HK$69m ÷ (HK$2.8b - HK$181m) (Based on the trailing twelve months to June 2020).

Therefore, Luks Group (Vietnam Holdings) has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 16%.

View our latest analysis for Luks Group (Vietnam Holdings)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Luks Group (Vietnam Holdings)'s ROCE against it's prior returns. If you're interested in investigating Luks Group (Vietnam Holdings)'s past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Luks Group (Vietnam Holdings). To be more specific, the ROCE was 4.3% five years ago, but since then it has dropped noticeably. 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. If these trends continue, we wouldn't expect Luks Group (Vietnam Holdings) to turn into a multi-bagger.

What We Can Learn From Luks Group (Vietnam Holdings)'s ROCE

In summary, it's unfortunate that Luks Group (Vietnam Holdings) is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 38% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing Luks Group (Vietnam Holdings), we've discovered 4 warning signs that you should be aware of.

While Luks Group (Vietnam 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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