Capital allocation trends at PPS International (Holdings) (HKG:8201) are not ideal

When it comes to investing, there are some useful financial figures that can warn us when a company may be in trouble. More often than not we will see a decline yield on invested capital (ROCE) and a downward trend quantity of the invested capital. This indicates to us that not only is the company shrinking the size of its net assets, but its returns are also falling. For that matter, looking for PPS International (Holdingen) (HKG:8201), we were not too optimistic about the way things were going.

Understanding return on capital employed (ROCE)

If you’re new to ROCE, it measures the ‘return’ (pre-tax profit) that a company generates from the capital invested in its operations. The formula for this calculation on PPS International (Holdings) is:

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

0.026 = HK$5.5 million ÷ (HK$307 million – HK$99 million) (Based on the last twelve months up to and including December 2023).

So, PPS International (Holdings) has a ROCE of 2.6%. In absolute terms that is a low return and it also performs below the commercial services sector average of 7.3%.

See our latest analysis for PPS International (Holdings)

Historical performance is a good starting point when researching a stock. Above you can see the measure of PPS International (Holdings) ROCE versus its past returns. If you want to delve into historical earnings, check this out free graphs detailing the turnover and cash flow of PPS International (Holdings).

So what is PPS International (Holdings) ROCE trend?

There is reason to be cautious regarding PPS International (Holdings), as returns are on a downward trend. Unfortunately, returns on capital have fallen from the 12% they earned five years ago. Furthermore, it is worth noting that the amount of capital deployed within the company has remained relatively stable. Because yields are falling and the company is using the same amount of assets, this could indicate that it is a mature company that has not seen much growth over the past five years. So because these trends are generally not conducive to creating a multi-bagger, we wouldn’t trust PPS International (Holdings) to become one if things remain as they are.

While we were talking about this, we noticed that the ratio of current debt to total assets has increased to 32%, which has had an impact on ROCE. If short-term debt hadn’t risen so much, ROCE could be even lower. While the ratio isn’t too high at the moment, it’s worth keeping an eye on this because if it gets particularly high the company could face some new elements of risk.

Our view on the ROCE of PPS International (Holdings).

In summary, it is a shame that PPS International (Holdings) generates a lower return with the same amount of capital. Long-term shareholders who have owned the stock for the past five years have experienced a 61% decline in the value of their investment, so it seems the market may not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Because virtually every business faces certain risks, it’s worth knowing what they are, and we’ve discovered them 3 Warning Signs for PPS International (Holdings) (2 of which don’t suit us very well!) that you should be aware of.

While PPS International (Holdings) doesn’t have the highest returns, take a look at this free list of companies that achieve high returns on equity with solid balance sheets.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.