Datronix Holdings (HKG:889) Has Some Difficulty Using Its Capital Effectively

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Datronix Holdings (HKG:889) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on Datronix Holdings is:

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

0.00074 = HK$678k ÷ (HK$947m - HK$33m) (Based on the trailing twelve months to June 2021).

Therefore, Datronix Holdings has an ROCE of 0.07%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 7.9%.

Check out our latest analysis for Datronix Holdings

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

What The Trend Of ROCE Can Tell Us

In terms of Datronix Holdings' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 1.7%, 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 Datronix Holdings to turn into a multi-bagger.

Our Take On Datronix Holdings' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 58% 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.

One more thing: We've identified 4 warning signs with Datronix Holdings (at least 1 which is significant) , and understanding these would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.