Capital Allocation Trends At Zall Smart Commerce Group (HKG:2098) Aren't Ideal

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Zall Smart Commerce Group (HKG:2098) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Zall Smart Commerce Group:

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

0.0097 = CN¥279m ÷ (CN¥62b - CN¥33b) (Based on the trailing twelve months to December 2020).

Thus, Zall Smart Commerce Group has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 3.7%.

Check out our latest analysis for Zall Smart Commerce Group

Above you can see how the current ROCE for Zall Smart Commerce Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Zall Smart Commerce Group.

So How Is Zall Smart Commerce Group's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 3.7% five years ago, while capital employed has grown 58%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Zall Smart Commerce Group might not have received a full period of earnings contribution from it.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 54%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.0%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Zall Smart Commerce Group's ROCE

To conclude, we've found that Zall Smart Commerce Group is reinvesting in the business, but returns have been falling. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 78% over the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zall Smart Commerce Group (of which 1 is significant!) that you should know about.

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.

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