These Metrics Don't Make Hock Lian Seng Holdings (SGX:J2T) Look Too Strong

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing 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, Hock Lian Seng Holdings (SGX:J2T) we aren't filled with optimism, but let's investigate further.

Understanding 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. The formula for this calculation on Hock Lian Seng Holdings is:

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

0.053 = S$11m ÷ (S$304m - S$92m) (Based on the trailing twelve months to June 2020).

Thus, Hock Lian Seng Holdings has an ROCE of 5.3%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 3.0%.

Check out our latest analysis for Hock Lian Seng Holdings

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

How Are Returns Trending?

In terms of Hock Lian Seng Holdings' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 46% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 On Hock Lian Seng Holdings' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with Hock Lian Seng Holdings (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

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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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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