Hypebeast (HKG:150) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Hypebeast (HKG:150) 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. The formula for this calculation on Hypebeast is:

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

0.12 = HK$59m ÷ (HK$628m - HK$133m) (Based on the trailing twelve months to September 2024).

Thus, Hypebeast has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Interactive Media and Services industry.

Check out our latest analysis for Hypebeast

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 Hypebeast's past further, check out this free graph covering Hypebeast's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Hypebeast, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 39% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Hypebeast has done well to pay down its current liabilities to 21% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Hypebeast's ROCE

In summary, we're somewhat concerned by Hypebeast's diminishing returns on increasing amounts of capital. This could explain why the stock has sunk a total of 80% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Hypebeast does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

While Hypebeast 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. 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.