Trendzon Holdings Group (HKG:1865) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after investigating Trendzon Holdings Group (HKG:1865), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Trendzon Holdings Group, this is the formula:

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

0.08 = S$4.1m ÷ (S$80m - S$29m) (Based on the trailing twelve months to September 2021).

Therefore, Trendzon Holdings Group has an ROCE of 8.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.5%.

Check out our latest analysis for Trendzon Holdings Group

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

What Can We Tell From Trendzon Holdings Group's ROCE Trend?

On the surface, the trend of ROCE at Trendzon Holdings Group doesn't inspire confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 8.0%. 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.

What We Can Learn From Trendzon Holdings 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 Trendzon Holdings Group. These growth trends haven't led to growth returns though, since the stock has fallen 65% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Trendzon Holdings Group does have some risks, we noticed 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.