IMS Group Holdings (HKG:8136) Is Reinvesting At Lower Rates Of Return

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at IMS Group Holdings (HKG:8136) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on IMS Group Holdings is:

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

0.08 = HK$8.2m ÷ (HK$124m - HK$21m) (Based on the trailing twelve months to September 2024).

Thus, IMS Group Holdings has an ROCE of 8.0%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 6.3%.

View our latest analysis for IMS Group Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for IMS Group Holdings' ROCE against it's prior returns. If you're interested in investigating IMS Group Holdings' past further, check out this free graph covering IMS Group Holdings' past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at IMS Group Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 8.0%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

What We Can Learn From IMS Group Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by IMS Group Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 48% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think IMS Group Holdings has the makings of a multi-bagger.

Like most companies, IMS Group Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While IMS Group Holdings 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.

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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.