Stock Analysis

Grandshores Technology Group (HKG:1647) Will Be Hoping To Turn Its Returns On Capital Around

SEHK:1647
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Grandshores Technology Group (HKG:1647) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Grandshores Technology Group, this is the formula:

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

0.12 = S$7.6m ÷ (S$73m - S$7.6m) (Based on the trailing twelve months to September 2021).

Thus, Grandshores Technology Group 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.

Check out our latest analysis for Grandshores Technology Group

roce
SEHK:1647 Return on Capital Employed December 30th 2021

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're interested in investigating Grandshores Technology Group's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We weren't thrilled with the trend because Grandshores Technology Group's ROCE has reduced by 71% over the last five years, while the business employed 209% more capital. Usually this isn't ideal, but given Grandshores Technology Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Grandshores Technology Group might not have received a full period of earnings contribution from it.

On a related note, Grandshores Technology Group has decreased its current liabilities to 10% 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.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Grandshores Technology Group is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 79% over the last three years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.

On a final note, we found 4 warning signs for Grandshores Technology Group (1 doesn't sit too well with us) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether Grandshores Technology Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.