There Are Reasons To Feel Uneasy About OneForce Holdings' (HKG:1933) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at OneForce Holdings (HKG:1933) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for OneForce Holdings:

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

0.12 = CN¥27m ÷ (CN¥434m - CN¥199m) (Based on the trailing twelve months to March 2022).

Therefore, OneForce Holdings has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 3.6% it's much better.

Check out the opportunities and risks within the HK Software industry.

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 want to delve into the historical earnings, revenue and cash flow of OneForce Holdings, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at OneForce Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 27% five years ago. 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.

On a side note, OneForce Holdings' current liabilities have increased over the last five years to 46% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that OneForce Holdings is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 67% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to know some of the risks facing OneForce Holdings we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

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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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.