When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Hosen Group (Catalist:5EV), we weren't too upbeat about how things were going.
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. To calculate this metric for Hosen Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = S$762k ÷ (S$50m - S$14m) (Based on the trailing twelve months to June 2023).
So, Hosen Group has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 8.7%.
View our latest analysis for Hosen Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hosen Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hosen Group, check out these free graphs here.
What Does the ROCE Trend For Hosen Group Tell Us?
There is reason to be cautious about Hosen Group, given the returns are trending downwards. About five years ago, returns on capital were 3.9%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hosen Group becoming one if things continue as they have.
What We Can Learn From Hosen Group's ROCE
In summary, it's unfortunate that Hosen Group is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 57% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.