Stock Analysis

Capital Allocation Trends At Smart Globe Holdings (HKG:1481) Aren't Ideal

SEHK:1481
Source: Shutterstock

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Smart Globe Holdings (HKG:1481) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Smart Globe Holdings, this is the formula:

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

0.021 = HK$2.9m ÷ (HK$159m - HK$24m) (Based on the trailing twelve months to December 2021).

Thus, Smart Globe Holdings has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.0%.

View our latest analysis for Smart Globe Holdings

roce
SEHK:1481 Return on Capital Employed July 25th 2022

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're interested in investigating Smart Globe Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Smart Globe Holdings' ROCE Trend?

On the surface, the trend of ROCE at Smart Globe Holdings doesn't inspire confidence. Around five years ago the returns on capital were 33%, but since then they've fallen to 2.1%. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Smart Globe Holdings has decreased its current liabilities to 15% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

While returns have fallen for Smart Globe Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 2,079% to shareholders in the last three years. 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.

If you want to continue researching Smart Globe Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.

About SEHK:1481

Smart Globe Holdings

An investment holding company, produces, prints, and distributes books, novelty items, and packaging products in Hong Kong, the United States, the United Kingdom, the Netherlands, Australia, the People's Republic of China, France, and internationally.

Flawless balance sheet very low.