Should We Be Excited About The Trends Of Returns At Ho Hup Construction Company Berhad (KLSE:HOHUP)?

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, while the ROCE is currently high for Ho Hup Construction Company Berhad (KLSE:HOHUP), we aren't jumping out of our chairs because returns are decreasing.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.20 = RM146m ÷ (RM1.4b - RM680m) (Based on the trailing twelve months to September 2020).

So, Ho Hup Construction Company Berhad has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 5.2% earned by companies in a similar industry.

Check out 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'd like to look at how Ho Hup Construction Company Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Ho Hup Construction Company Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 34% where it was five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Ho Hup Construction Company Berhad's current liabilities are still rather high at 49% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

While returns have fallen for Ho Hup Construction Company Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 54% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Ho Hup Construction Company Berhad (of which 2 can't be ignored!) that you should know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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