Apex Ace Holding (HKG:6036) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Apex Ace Holding (HKG:6036), it didn't seem to tick all of these boxes.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Apex Ace Holding is:

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

0.031 = HK$10m ÷ (HK$730m - HK$405m) (Based on the trailing twelve months to June 2020).

So, Apex Ace Holding has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 8.6%.

View our latest analysis for Apex Ace Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Apex Ace Holding's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Apex Ace Holding, check out these free graphs here.

What Does the ROCE Trend For Apex Ace Holding Tell Us?

When we looked at the ROCE trend at Apex Ace Holding, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.1% from 20% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Another thing to note, Apex Ace Holding has a high ratio of current liabilities to total assets of 56%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Apex Ace Holding's ROCE

We're a bit apprehensive about Apex Ace Holding because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last three years have experienced a 64% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 5 warning signs for Apex Ace Holding (2 are significant) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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