TK Group (Holdings) (HKG:2283) Could Be Struggling To Allocate Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at TK Group (Holdings) (HKG:2283), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

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 TK Group (Holdings), this is the formula:

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

0.15 = HK$235m ÷ (HK$2.6b - HK$1.0b) (Based on the trailing twelve months to December 2020).

Therefore, TK Group (Holdings) has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Machinery industry.

See our latest analysis for TK Group (Holdings)

Above you can see how the current ROCE for TK Group (Holdings) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering TK Group (Holdings) here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at TK Group (Holdings) doesn't inspire confidence. To be more specific, ROCE has fallen from 31% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for TK Group (Holdings) have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 81% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing, we've spotted 1 warning sign facing TK Group (Holdings) that you might find interesting.

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