The Returns On Capital At Guoco Group (HKG:53) Don't Inspire Confidence

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Guoco Group (HKG:53), it didn't seem to tick all of these boxes.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Guoco Group is:

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

0.0069 = US$104m ÷ (US$17b - US$1.9b) (Based on the trailing twelve months to June 2021).

Therefore, Guoco Group has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Industrials industry average of 3.3%.

See our latest analysis for Guoco 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're interested in investigating Guoco Group's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Guoco Group's ROCE Trending?

In terms of Guoco Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.7% from 3.9% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Guoco Group's ROCE

In summary, we're somewhat concerned by Guoco Group's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 15% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to know some of the risks facing Guoco Group we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While Guoco Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.