There Are Reasons To Feel Uneasy About Gain Plus Holdings' (HKG:9900) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after briefly looking over the numbers, we don't think Gain Plus Holdings (HKG:9900) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Gain Plus Holdings, this is the formula:

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).

Thus, Gain Plus Holdings has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.5% 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.

What Can We Tell From Gain Plus Holdings' ROCE Trend?

On the surface, the trend of ROCE at Gain Plus Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% from 50% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. 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. Keep in mind 43% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

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 36% 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.

Gain Plus Holdings does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is potentially serious...

While Gain Plus Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.