The Returns On Capital At G.A. Holdings (HKG:8126) Don't Inspire Confidence

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, G.A. Holdings (HKG:8126) we aren't filled with optimism, but let's investigate further.

What Is 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. Analysts use this formula to calculate it for G.A. Holdings:

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

0.027 = HK$23m ÷ (HK$1.8b - HK$969m) (Based on the trailing twelve months to June 2024).

Therefore, G.A. Holdings has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Retail Distributors industry average of 14%.

See our latest analysis for G.A. Holdings

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

So How Is G.A. Holdings' ROCE Trending?

We are a bit worried about the trend of returns on capital at G.A. Holdings. About five years ago, returns on capital were 10.0%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect G.A. Holdings to turn into a multi-bagger.

Another thing to note, G.A. Holdings has a high ratio of current liabilities to total assets of 53%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From G.A. Holdings' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. This could explain why the stock has sunk a total of 91% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing G.A. Holdings we've found 4 warning signs (3 can't be ignored!) that you should be aware of before investing here.

While G.A. 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.