The Returns On Capital At AV Promotions Holdings (HKG:8419) Don't Inspire Confidence

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at AV Promotions Holdings (HKG:8419), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.13 = HK$21m ÷ (HK$298m - HK$133m) (Based on the trailing twelve months to September 2021).

So, AV Promotions Holdings has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.0% 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

When we looked at the ROCE trend at AV Promotions Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 13%. 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 side note, AV Promotions Holdings has done well to pay down its current liabilities to 45% of total assets. That could partly explain why the ROCE has dropped. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On AV Promotions Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that AV Promotions Holdings is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 28% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about AV Promotions Holdings, we've spotted 4 warning signs, and 1 of them is potentially serious.

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. 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.