Returns On Capital At Ho Hup Construction Company Berhad (KLSE:HOHUP) Paint A Concerning Picture

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Ho Hup Construction Company Berhad (KLSE:HOHUP), it didn't seem to tick all of these boxes.

Understanding 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 Ho Hup Construction Company Berhad:

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

0.14 = RM120m ÷ (RM1.4b - RM540m) (Based on the trailing twelve months to March 2021).

Thus, Ho Hup Construction Company Berhad has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 5.9% it's much better.

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're interested in investigating Ho Hup Construction Company Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Ho Hup Construction Company Berhad Tell Us?

On the surface, the trend of ROCE at Ho Hup Construction Company Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% from 26% 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.

In Conclusion...

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 46% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Ho Hup Construction Company Berhad (of which 3 are potentially serious!) that you should know about.

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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