Investors May Be Concerned About Capital Returns of Pacific Textiles Holdings (HKG: 1382)

If you envision a mature business that is past the growth stage, what are the underlying trends that emerge? Declining businesses often have two underlying trends, on the one hand, a decline to recover on capital employed (ROCE) and a decrease based capital employed. This reveals that the company is not increasing the wealth of its shareholders, as returns decline and its net asset base shrinks. So after considering Pacific Textiles Holdings (HKG: 1382), the above trends didn’t look very good.

Understanding Return on Capital Employed (ROCE)

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Pacific Textiles Holdings, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.20 = HK $ 751 million ÷ (HK $ 5.7 billion – HK $ 2.1 billion) (Based on the last twelve months up to September 2021).

Thereby, Pacific Textiles Holdings has a ROCE of 20%. This is a fantastic return and not only that, it exceeds the 7.0% average earned by companies in a similar industry.

See our latest analysis for Pacific Textiles Holdings

SEHK: 1382 Return on capital employed on December 6, 2021

Above you can see how Pacific Textiles Holdings’ current ROCE compares to its previous returns on equity, but there is little you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Pacific Textiles Holdings.

The ROCE trend

In terms of Pacific Textiles Holdings’ historic ROCE movements, the trend does not inspire confidence. About five years ago, returns on capital were 32%, but now they are significantly lower than what we saw above. Meanwhile, the capital employed in the company has remained roughly stable over the period. Companies that exhibit these attributes tend not to shrink, but they can be mature and face pressure on their competitive margins. So, because these trends are generally not conducive to building a multi-bagger, we won’t be holding our breath on Pacific Textiles Holdings in becoming one if things continue the way they have.

The key to take away

Ultimately, the downward trend in returns on the same amount of capital is usually not an indication that we are considering a growth stock. So it’s no surprise that the stock has fallen 35% in the past five years, so it looks like investors are recognizing these changes. Unless there is a change to a more positive trajectory in these metrics, we would look elsewhere.

Like most businesses, Pacific Textiles Holdings carries certain risks, and we have found 1 warning sign that you need to be aware of.

If you want to look for other stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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