Returns On Capital At AV Promotions Holdings (HKG:8419) Paint A Concerning Picture

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating AV Promotions Holdings (HKG:8419), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for AV Promotions Holdings:

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

0.11 = HK$18m ÷ (HK$298m - HK$135m) (Based on the trailing twelve months to December 2020).

Therefore, AV Promotions Holdings has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.3% generated by the Commercial Services industry.

View our latest analysis for AV Promotions Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for AV Promotions Holdings' ROCE against it's prior returns. If you'd like to look at how AV Promotions Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at AV Promotions Holdings doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 11%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, AV Promotions Holdings has decreased its current liabilities to 45% of total assets. That could partly explain why the ROCE has dropped. 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. 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 45% is still pretty high, so those risks are still somewhat prevalent.

Our Take On AV Promotions Holdings' ROCE

We're a bit apprehensive about AV Promotions Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. This could explain why the stock has sunk a total of 88% in the last three years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about AV Promotions Holdings, we've spotted 5 warning signs, and 1 of them is a bit concerning.

While AV Promotions 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. 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.
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