Is Lifestyle International Holdings (HKG:1212) Set To Make A Turnaround?

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Lifestyle International Holdings (HKG:1212), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Lifestyle International Holdings:

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

0.059 = HK$1.1b ÷ (HK$23b - HK$5.1b) (Based on the trailing twelve months to June 2020).

Thus, Lifestyle International Holdings has an ROCE of 5.9%. On its own, that's a low figure but it's around the 7.2% average generated by the Multiline Retail industry.

View our latest analysis for Lifestyle International Holdings

In the above chart we have measured Lifestyle International Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Lifestyle International Holdings here for free.

How Are Returns Trending?

The trend of ROCE at Lifestyle International Holdings is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 5.9% we see today. In addition to that, Lifestyle International Holdings is now employing 27% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line

In summary, it's unfortunate that Lifestyle International Holdings is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 31% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 3 warning signs for Lifestyle International Holdings (1 can't be ignored) you should be aware of.

While Lifestyle International Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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