Thelloy Development Group (HKG:1546) 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? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Thelloy Development Group (HKG:1546), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 Thelloy Development Group is:

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).

So, Thelloy Development Group has an ROCE of 9.6%. On its own that's a low return, but compared to the average of 7.2% 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 want to delve into the historical earnings, revenue and cash flow of Thelloy Development Group, check out these free graphs here.

The Trend Of ROCE

In terms of Thelloy Development Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 45%, but since then they've fallen to 9.6%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Thelloy Development Group's current liabilities are still rather high at 50% of total assets. 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.

Our Take On Thelloy Development Group's ROCE

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. And there could be an opportunity here if other metrics look good too, because the stock has declined 59% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 3 warning signs we've spotted with Thelloy Development Group (including 2 which can't be ignored) .

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.