Capital Allocation Trends At Best Linking Group Holdings (HKG:9882) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Best Linking Group Holdings (HKG:9882), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Best Linking Group Holdings is:

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

0.091 = HK$13m ÷ (HK$146m - HK$5.8m) (Based on the trailing twelve months to June 2024).

Therefore, Best Linking Group Holdings has an ROCE of 9.1%. Even though it's in line with the industry average of 8.8%, it's still a low return by itself.

Check out our latest analysis for Best Linking Group Holdings

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'd like to look at how Best Linking Group Holdings has performed in the past in other metrics, you can view this free graph of Best Linking Group Holdings' past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Best Linking Group Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 30%, but since then they've fallen to 9.1%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

What We Can Learn From Best Linking Group Holdings' ROCE

In summary, we're somewhat concerned by Best Linking Group Holdings' diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 244% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 2 warning signs we've spotted with Best Linking Group Holdings (including 1 which is a bit unpleasant) .

While Best Linking 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.