Returns On Capital Signal Difficult Times Ahead For Honey Hope Honesty EnterpriseLtd (GTSM:8043)

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Honey Hope Honesty EnterpriseLtd (GTSM:8043), we've spotted some signs that it could be struggling, so let's investigate.

What is 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. To calculate this metric for Honey Hope Honesty EnterpriseLtd, this is the formula:

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

0.026 = NT$68m ÷ (NT$4.7b - NT$2.0b) (Based on the trailing twelve months to December 2020).

Thus, Honey Hope Honesty EnterpriseLtd has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.

Check out our latest analysis for Honey Hope Honesty EnterpriseLtd

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

What Does the ROCE Trend For Honey Hope Honesty EnterpriseLtd Tell Us?

We are a bit worried about the trend of returns on capital at Honey Hope Honesty EnterpriseLtd. Unfortunately the returns on capital have diminished from the 4.5% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Honey Hope Honesty EnterpriseLtd to turn into a multi-bagger.

Another thing to note, Honey Hope Honesty EnterpriseLtd has a high ratio of current liabilities to total assets of 44%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

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. Yet despite these poor fundamentals, the stock has gained a huge 165% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 3 warning signs we've spotted with Honey Hope Honesty EnterpriseLtd (including 1 which can't be ignored) .

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.

If you decide to trade Honey Hope Honesty EnterpriseLtd, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.