A.Plus Group Holdings (HKG:1841) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after briefly looking over the numbers, we don't think A.Plus Group Holdings (HKG:1841) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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

0.14 = HK$23m ÷ (HK$208m - HK$40m) (Based on the trailing twelve months to March 2021).

So, A.Plus Group Holdings has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Commercial Services industry.

Check out our latest analysis for A.Plus 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're interested in investigating A.Plus Group Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For A.Plus Group Holdings Tell Us?

On the surface, the trend of ROCE at A.Plus Group Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 59% over the last five years. However it looks like A.Plus 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 side note, A.Plus Group Holdings has done well to pay down its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 On A.Plus Group Holdings' ROCE

To conclude, we've found that A.Plus Group Holdings is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 47% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to continue researching A.Plus Group Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.

While A.Plus 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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