Is Hiroca Holdings (TPE:1338) Headed For Trouble?

When researching a stock for investment, what can tell us that the company is in decline? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Hiroca Holdings (TPE:1338), so let's see why.

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. Analysts use this formula to calculate it for Hiroca Holdings:

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

0.04 = NT$257m ÷ (NT$9.5b - NT$3.1b) (Based on the trailing twelve months to September 2020).

Thus, Hiroca Holdings has an ROCE of 4.0%. On its own, that's a low figure but it's around the 4.7% average generated by the Auto Components industry.

See our latest analysis for Hiroca 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'd like to look at how Hiroca Holdings 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

We are a bit worried about the trend of returns on capital at Hiroca Holdings. Unfortunately the returns on capital have diminished from the 14% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Hiroca Holdings to turn into a multi-bagger.

What We Can Learn From Hiroca 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. Investors haven't taken kindly to these developments, since the stock has declined 37% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Hiroca Holdings does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Hiroca Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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