When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Hock Lian Seng Holdings (SGX:J2T), we weren't too upbeat about how things were going.

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. The formula for this calculation on Hock Lian Seng Holdings is:

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

0.04 = S$9.2m ÷ (S$349m - S$119m) (Based on the trailing twelve months to June 2022).

So, Hock Lian Seng Holdings has an ROCE of 4.0%. On its own that's a low return, but compared to the average of 2.0% generated by the Construction industry, it's much better.

Check out our latest analysis for Hock Lian Seng Holdings

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

What Can We Tell From Hock Lian Seng Holdings' ROCE Trend?

We are a bit worried about the trend of returns on capital at Hock Lian Seng Holdings. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Hock Lian Seng Holdings to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Hock Lian Seng Holdings is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 34% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Hock Lian Seng Holdings (1 can't be ignored) you should be aware of.

While Hock Lian Seng 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.

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

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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