Skymission Group Holdings (HKG:1429) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Skymission Group Holdings (HKG:1429) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Skymission Group Holdings, this is the formula:

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

0.12 = HK$43m ÷ (HK$434m - HK$87m) (Based on the trailing twelve months to September 2021).

Thus, Skymission Group Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Construction industry.

See our latest analysis for Skymission Group Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Skymission Group Holdings' ROCE against it's prior returns. If you'd like to look at how Skymission Group Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Skymission Group Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 56% over the last four years. However it looks like Skymission Group Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Skymission Group Holdings has decreased its current liabilities to 20% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Skymission Group Holdings' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 39% in the last year. Therefore based on the analysis done in this article, we don't think Skymission Group Holdings has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Skymission Group Holdings (including 1 which is significant) .

While Skymission Group Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.