Capital Allocation Trends At Easyhome New Retail Group (SZSE:000785) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Easyhome New Retail Group (SZSE:000785) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Easyhome New Retail Group, this is the formula:

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

0.038 = CN¥1.6b ÷ (CN¥52b - CN¥9.7b) (Based on the trailing twelve months to September 2024).

Therefore, Easyhome New Retail Group has an ROCE of 3.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.9%.

Check out our latest analysis for Easyhome New Retail Group

In the above chart we have measured Easyhome New Retail Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Easyhome New Retail Group for free.

What Can We Tell From Easyhome New Retail Group's ROCE Trend?

When we looked at the ROCE trend at Easyhome New Retail Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Easyhome New Retail Group's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 35% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing Easyhome New Retail Group, we've discovered 3 warning signs that you should be aware of.

While Easyhome New Retail Group 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.