The Returns On Capital At Gain Plus Holdings (HKG:9900) Don't Inspire Confidence

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Although, when we looked at Gain Plus Holdings (HKG:9900), it didn't seem to tick all of these boxes.

What is 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 Gain Plus Holdings is:

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

0.14 = HK$34m ÷ (HK$422m - HK$182m) (Based on the trailing twelve months to September 2021).

Therefore, Gain Plus Holdings has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Construction industry.

View our latest analysis for Gain Plus Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gain Plus Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Gain Plus Holdings, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Gain Plus Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 50% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Gain Plus Holdings has decreased its current liabilities to 43% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On Gain Plus Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Gain Plus Holdings is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 91% over the last three years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing: We've identified 2 warning signs with Gain Plus Holdings (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

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. 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.