Slowing Rates Of Return At Luk Fook Holdings (International) (HKG:590) Leave Little Room For Excitement

By
Simply Wall St
Published
April 21, 2022
SEHK:590
Source: Shutterstock

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Luk Fook Holdings (International) (HKG:590) looks decent, right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Luk Fook Holdings (International), this is the formula:

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

0.14 = HK$1.7b ÷ (HK$16b - HK$4.2b) (Based on the trailing twelve months to September 2021).

Therefore, Luk Fook Holdings (International) has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 12%.

Check out our latest analysis for Luk Fook Holdings (International)

roce
SEHK:590 Return on Capital Employed April 21st 2022

Above you can see how the current ROCE for Luk Fook Holdings (International) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Luk Fook Holdings (International).

What The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 33% more capital into its operations. 14% is a pretty standard return, and it provides some comfort knowing that Luk Fook Holdings (International) has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 26% of total assets, this reported ROCE would probably be less than14% because total capital employed would be higher.The 14% ROCE could be even lower if current liabilities weren't 26% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Key Takeaway

In the end, Luk Fook Holdings (International) has proven its ability to adequately reinvest capital at good rates of return. Yet over the last five years the stock has declined 16%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

If you want to continue researching Luk Fook Holdings (International), you might be interested to know about the 1 warning sign that our analysis has discovered.

While Luk Fook Holdings (International) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.