Grown Up Group Investment Holdings' (HKG:1842) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Grown Up Group Investment Holdings (HKG:1842), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Grown Up Group Investment Holdings is:

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

0.0028 = HK$388k ÷ (HK$276m - HK$138m) (Based on the trailing twelve months to December 2022).

Thus, Grown Up Group Investment Holdings has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.

View our latest analysis for Grown Up Group Investment Holdings

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

So How Is Grown Up Group Investment Holdings' ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 40% five years ago, while the business's capital employed increased by 48%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Grown Up Group Investment Holdings might not have received a full period of earnings contribution from it.

On a related note, Grown Up Group Investment Holdings has decreased its current liabilities to 50% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line

While returns have fallen for Grown Up Group Investment Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Despite these promising trends, the stock has collapsed 87% over the last three years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

One more thing: We've identified 4 warning signs with Grown Up Group Investment Holdings (at least 2 which are significant) , and understanding these would certainly be useful.

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.