Be Wary Of Thelloy Development Group (HKG:1546) And Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at Thelloy Development Group (HKG:1546), it didn't seem to tick all of these boxes.

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

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 Thelloy Development Group, this is the formula:

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

0.096 = HK$15m ÷ (HK$311m - HK$156m) (Based on the trailing twelve months to September 2022).

Therefore, Thelloy Development Group has an ROCE of 9.6%. On its own that's a low return, but compared to the average of 7.0% generated by the Construction industry, it's much better.

See our latest analysis for Thelloy Development Group

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

So How Is Thelloy Development Group's ROCE Trending?

On the surface, the trend of ROCE at Thelloy Development Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.6% from 45% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Thelloy Development Group has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Thelloy Development Group. Despite these promising trends, the stock has collapsed 74% over the last five years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

Thelloy Development Group does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are significant...

While Thelloy Development 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.