Does Cowell e Holdings Inc (HKG:1415)'s Capital Return Make The Cut?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want a simplistic look at the return on Cowell e Holdings Inc (HKG:1415) stock.

Cowell e Holdings stock represents an ownership share in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently Cowell e Holdings is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

View our latest analysis for Cowell e Holdings

Cowell e Holdings's Return On Capital Employed

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. The cost of missing out on another opportunity comes in the form of the potential long term gain you could've received, which is dependent on the gap between the return on capital you could've achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We'll look at Cowell e Holdings’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. 1415’s ROCE is calculated below:

The calculation above shows that 1415’s earnings were 9.84% of capital employed. A good ROCE hurdle you should aim for in your investments is 15%, which 1415 has failed to reach, meaning the company creates an unimpressive amount of earnings from capital employed.

What is causing this?

The underperforming ROCE is not ideal for Cowell e Holdings investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, 1415's ROCE may increase, in which case your portfolio could benefit from holding the company. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. If you go back three years, you'll find that 1415’s ROCE has decreased from 34.95%. In this time, earnings have fallen from US$67.96m to US$32.85m and capital employed has increased due to a smaller reliance on current liabilities (less borrowed money) , which means the company's ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.

Next Steps

Cowell e Holdings’s ROCE has decreased in the recent past and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. But don't forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate 1415 or move on to other alternatives.

1. Future Outlook: What are well-informed industry analysts predicting for 1415’s future growth? Take a look at our free research report of analyst consensus for 1415’s outlook.
2. Valuation: What is 1415 worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether 1415 is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.