There Are Reasons To Feel Uneasy About TK Group (Holdings)'s (HKG:2283) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at TK Group (Holdings) (HKG:2283) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for TK Group (Holdings), this is the formula:

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

0.15 = HK$255m ÷ (HK$2.5b - HK$800m) (Based on the trailing twelve months to June 2023).

Thus, TK Group (Holdings) has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 7.4% it's much better.

See our latest analysis for TK Group (Holdings)

In the above chart we have measured TK Group (Holdings)'s prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is TK Group (Holdings)'s ROCE Trending?

On the surface, the trend of ROCE at TK Group (Holdings) doesn't inspire confidence. To be more specific, ROCE has fallen from 38% over the last five years. However it looks like TK 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 related note, TK Group (Holdings) has decreased its current liabilities to 33% 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.

What We Can Learn From TK Group (Holdings)'s ROCE

To conclude, we've found that TK Group (Holdings) is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 57% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think TK Group (Holdings) has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for TK Group (Holdings) you'll probably want to 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.