Hock Lian Seng Holdings (SGX:J2T) Has Some Difficulty Using Its Capital Effectively

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Hock Lian Seng Holdings (SGX:J2T), we've spotted some signs that it could be struggling, so let's investigate.

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 Hock Lian Seng Holdings:

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

0.0084 = S$1.8m ÷ (S$317m - S$105m) (Based on the trailing twelve months to June 2021).

So, Hock Lian Seng Holdings has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 1.5%.

Check out our latest analysis for Hock Lian Seng Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Hock Lian Seng Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Hock Lian Seng Holdings, given the returns are trending downwards. To be more specific, the ROCE was 2.8% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hock Lian Seng Holdings becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Hock Lian Seng Holdings is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 15% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Hock Lian Seng Holdings does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

While Hock Lian Seng Holdings 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.