Investors Could Be Concerned With OneForce Holdings' (HKG:1933) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at OneForce Holdings (HKG:1933), it didn't seem to tick all of these boxes.

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 OneForce Holdings, this is the formula:

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

0.12 = CN¥26m ÷ (CN¥364m - CN¥149m) (Based on the trailing twelve months to March 2021).

Therefore, OneForce Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Software industry.

See our latest analysis for OneForce Holdings

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

What Does the ROCE Trend For OneForce Holdings Tell Us?

When we looked at the ROCE trend at OneForce Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 39%, but since then they've fallen to 12%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, OneForce Holdings has a high ratio of current liabilities to total assets of 41%. 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 OneForce Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for OneForce Holdings. And there could be an opportunity here if other metrics look good too, because the stock has declined 54% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 2 warning signs for OneForce Holdings you'll probably want to know about.

While OneForce 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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