Should You Be Worried About Honey Hope Honesty EnterpriseLtd's (GTSM:8043) Returns On Capital?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. 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.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Honey Hope Honesty EnterpriseLtd is:

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

0.022 = NT$56m ÷ (NT$4.2b - NT$1.6b) (Based on the trailing twelve months to September 2020).

Therefore, Honey Hope Honesty EnterpriseLtd has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 11%.

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're interested in investigating Honey Hope Honesty EnterpriseLtd's past further, check out this free graph of past earnings, revenue and cash flow.

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

There is reason to be cautious about Honey Hope Honesty EnterpriseLtd, given the returns are trending downwards. To be more specific, the ROCE was 4.5% five years ago, but since then it has dropped noticeably. 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 Honey Hope Honesty EnterpriseLtd to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Honey Hope Honesty EnterpriseLtd is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 130%. 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 2 warning signs we've spotted with Honey Hope Honesty EnterpriseLtd (including 1 which can't be ignored) .

While Honey Hope Honesty EnterpriseLtd 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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