Pou Sheng International (Holdings) (HKG:3813) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Pou Sheng International (Holdings) (HKG:3813) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Pou Sheng International (Holdings):

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

0.06 = CN¥579m ÷ (CN¥14b - CN¥3.9b) (Based on the trailing twelve months to March 2023).

So, Pou Sheng International (Holdings) has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 9.0%.

View our latest analysis for Pou Sheng International (Holdings)

Above you can see how the current ROCE for Pou Sheng International (Holdings) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Pou Sheng International (Holdings) here for free.

So How Is Pou Sheng International (Holdings)'s ROCE Trending?

When we looked at the ROCE trend at Pou Sheng International (Holdings), we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. 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 related note, Pou Sheng International (Holdings) has decreased its current liabilities to 29% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Key Takeaway

In summary, we're somewhat concerned by Pou Sheng International (Holdings)'s diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 59% 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.

Pou Sheng International (Holdings) could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Pou Sheng 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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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.