Skymission Group Holdings (HKG:1429) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Skymission Group Holdings (HKG:1429), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Skymission Group Holdings is:

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).

Therefore, Skymission Group Holdings has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 8.5% it's much better.

View 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're interested in investigating Skymission Group Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Skymission Group Holdings' ROCE Trend?

When we looked at the ROCE trend at Skymission Group Holdings, we didn't gain much confidence. Around four years ago the returns on capital were 56%, but since then they've fallen to 12%. 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.

On a related note, Skymission Group Holdings has decreased its current liabilities to 20% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Skymission Group Holdings' ROCE

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. Since the stock has declined 35% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Skymission Group Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

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.