Some Investors May Be Worried About A.Plus Group Holdings' (HKG:1841) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at A.Plus Group Holdings (HKG:1841), it didn't seem to tick all of these boxes.

Understanding 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 A.Plus Group Holdings, this is the formula:

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

0.17 = HK$21m ÷ (HK$164m - HK$35m) (Based on the trailing twelve months to September 2021).

Thus, A.Plus Group Holdings has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 9.1% it's much better.

View 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 want to delve into the historical earnings, revenue and cash flow of A.Plus Group Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at A.Plus Group Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 17% from 33% five years ago. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On A.Plus Group Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by A.Plus Group Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 16% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

A.Plus Group Holdings does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

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.