Here's What's Concerning About IBI Group Holdings' (HKG:1547) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 briefly looking over the numbers, we don't think IBI Group Holdings (HKG:1547) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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

0.10 = HK$15m ÷ (HK$389m - HK$241m) (Based on the trailing twelve months to September 2020).

Therefore, IBI Group Holdings has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Construction industry average of 9.1%.

Check out our latest analysis for IBI Group Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how IBI Group Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is IBI Group Holdings' ROCE Trending?

In terms of IBI Group Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 59%, but since then they've fallen to 10%. However it looks like IBI 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, IBI Group Holdings has done well to pay down its current liabilities to 62% of total assets. So we could link some of this to the decrease in ROCE. 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. Keep in mind 62% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

In summary, IBI Group Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 51% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Like most companies, IBI Group Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.

While IBI Group Holdings 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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