Stock Analysis

Pou Sheng International (Holdings) (HKG:3813) Will Be Hoping To Turn Its Returns On Capital Around

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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. 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.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Pou Sheng International (Holdings) is:

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

0.032 = CN¥316m ÷ (CN¥15b - CN¥5.7b) (Based on the trailing twelve months to September 2022).

Thus, Pou Sheng International (Holdings) has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 12%.

Check out our latest analysis for Pou Sheng International (Holdings)

SEHK:3813 Return on Capital Employed March 15th 2023

In the above chart we have measured Pou Sheng International (Holdings)'s 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 Pou Sheng International (Holdings) here for free.

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

On the surface, the trend of ROCE at Pou Sheng International (Holdings) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.2% from 12% 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.

What We Can Learn From Pou Sheng International (Holdings)'s ROCE

In summary, we're somewhat concerned by Pou Sheng International (Holdings)'s diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 63% 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 separate note, we've found 1 warning sign for Pou Sheng International (Holdings) you'll probably want to know about.

While Pou Sheng International (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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Find out whether Pou Sheng International (Holdings) is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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