UNQ Holdings (HKG:2177) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at UNQ Holdings (HKG:2177), it didn't seem to tick all of these boxes.

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Understanding 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. Analysts use this formula to calculate it for UNQ Holdings:

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

0.042 = CN¥31m ÷ (CN¥1.2b - CN¥441m) (Based on the trailing twelve months to December 2024).

Thus, UNQ Holdings has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 8.0%.

View our latest analysis for UNQ Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for UNQ Holdings' ROCE against it's prior returns. If you'd like to look at how UNQ Holdings has performed in the past in other metrics, you can view this free graph of UNQ Holdings' past earnings, revenue and cash flow.

What Can We Tell From UNQ Holdings' ROCE Trend?

On the surface, the trend of ROCE at UNQ Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.2% from 30% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, UNQ Holdings has done well to pay down its current liabilities to 37% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From UNQ Holdings' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for UNQ Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last three yearsthe stock has delivered a respectable 86% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 3 warning signs facing UNQ Holdings that you might find interesting.

While UNQ 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. 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.