Capital Allocation Trends At Ho Hup Construction Company Berhad (KLSE:HOHUP) Aren't Ideal

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Ho Hup Construction Company Berhad (KLSE:HOHUP), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Ho Hup Construction Company Berhad, this is the formula:

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

0.0053 = RM4.4m ÷ (RM1.5b - RM678m) (Based on the trailing twelve months to March 2022).

So, Ho Hup Construction Company Berhad has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.6%.

See our latest analysis for Ho Hup Construction Company Berhad

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

The Trend Of ROCE

On the surface, the trend of ROCE at Ho Hup Construction Company Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 19% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Ho Hup Construction Company Berhad's current liabilities are still rather high at 45% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Ho Hup Construction Company Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 60% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Ho Hup Construction Company Berhad we've found 3 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

While Ho Hup Construction Company Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.