Returns On Capital At Best Linking Group Holdings (HKG:8617) Paint An Interesting Picture

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Best Linking Group Holdings (HKG:8617) and its ROCE trend, we weren't exactly thrilled.

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

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 Best Linking Group Holdings, this is the formula:

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

0.17 = HK$15m ÷ (HK$94m - HK$4.7m) (Based on the trailing twelve months to September 2020).

Therefore, Best Linking Group Holdings has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 8.8% it's much better.

Check out our latest analysis for Best Linking Group Holdings

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

So How Is Best Linking Group Holdings' ROCE Trending?

On the surface, the trend of ROCE at Best Linking Group Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 35% over the last two years. However it looks like Best Linking 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, Best Linking Group Holdings has decreased its current liabilities to 5.0% 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.

The Bottom Line

To conclude, we've found that Best Linking Group Holdings is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 4.3% over the last year, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Like most companies, Best Linking Group Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.

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. 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.
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