Hup Seng Industries Berhad (KLSE:HUPSENG) May Have Issues Allocating Its Capital
If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. So after we looked into Hup Seng Industries Berhad (KLSE:HUPSENG), the trends above didn't look too great.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Hup Seng Industries Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
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0.24 = RM36m ÷ (RM214m - RM64m) (Based on the trailing twelve months to March 2023).
Thus, Hup Seng Industries Berhad has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Food industry average of 8.5%.
Check out our latest analysis for Hup Seng Industries Berhad
In the above chart we have measured Hup Seng Industries Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hup Seng Industries Berhad.
How Are Returns Trending?
We are a bit worried about the trend of returns on capital at Hup Seng Industries Berhad. About five years ago, returns on capital were 33%, however they're now substantially lower than that as we saw above. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hup Seng Industries Berhad becoming one if things continue as they have.
Our Take On Hup Seng Industries Berhad's 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 18% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.