Can Casablanca Group (HKG:2223) Continue To Grow Its Returns On Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So when we looked at Casablanca Group (HKG:2223) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Casablanca Group, this is the formula:

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

0.023 = HK$9.2m ÷ (HK$475m - HK$73m) (Based on the trailing twelve months to June 2020).

So, Casablanca Group has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 16%.

View our latest analysis for Casablanca Group

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'd like to look at how Casablanca Group 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

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 69% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Our Take On Casablanca Group's ROCE

In summary, we're delighted to see that Casablanca Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. However the stock is down a substantial 78% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you'd like to know about the risks facing Casablanca Group, we've discovered 3 warning signs that you should be aware of.

While Casablanca Group 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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