The Returns On Capital At IMS Group Holdings (HKG:8136) Don't Inspire Confidence

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at IMS Group Holdings (HKG:8136) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for IMS Group Holdings, this is the formula:

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

0.11 = HK$8.7m ÷ (HK$111m - HK$32m) (Based on the trailing twelve months to June 2023).

Thus, IMS Group Holdings has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 5.6% it's much better.

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 of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of IMS Group Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 24%, but since then they've fallen to 11%. 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.

The Bottom Line On IMS Group Holdings' ROCE

To conclude, we've found that IMS Group Holdings is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 85% over the last five years, it appears investors are expecting the worst. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know about the risks facing IMS Group Holdings, we've discovered 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.