In Construction Holdings (HKG:1500) Could Be At Risk Of Shrinking As A Company

When researching a stock for investment, what can tell us that the company is 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. And from a first read, things don't look too good at In Construction Holdings (HKG:1500), so let's see why.

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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. The formula for this calculation on In Construction Holdings is:

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

0.0076 = HK$1.8m ÷ (HK$393m - HK$149m) (Based on the trailing twelve months to September 2024).

So, In Construction Holdings has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.2%.

Check out our latest analysis for In Construction Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how In Construction Holdings has performed in the past in other metrics, you can view this free graph of In Construction Holdings' past earnings, revenue and cash flow.

What Does the ROCE Trend For In Construction Holdings Tell Us?

There is reason to be cautious about In Construction Holdings, given the returns are trending downwards. To be more specific, the ROCE was 5.2% 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 In Construction Holdings to turn into a multi-bagger.

Our Take On In Construction Holdings' 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. Long term shareholders who've owned the stock over the last five years have experienced a 24% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing In Construction Holdings, we've discovered 2 warning signs that you should be aware of.

While In Construction 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.

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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.