HC Group (HKG:2280) Could Be Struggling To Allocate 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating HC Group (HKG:2280), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for HC Group:

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

0.00021 = CN¥955k ÷ (CN¥6.6b - CN¥2.2b) (Based on the trailing twelve months to December 2020).

Thus, HC Group has an ROCE of 0.02%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 3.5%.

View our latest analysis for HC Group

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 want to delve into the historical earnings, revenue and cash flow of HC Group, check out these free graphs here.

What Does the ROCE Trend For HC Group Tell Us?

On the surface, the trend of ROCE at HC Group doesn't inspire confidence. Around five years ago the returns on capital were 0.8%, but since then they've fallen to 0.02%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On HC Group's ROCE

In summary, HC Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 82% over the last five years. Therefore based on the analysis done in this article, we don't think HC Group has the makings of a multi-bagger.

On a final note, we found 2 warning signs for HC Group (1 is a bit concerning) you should be aware of.

While HC Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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