Crystal International Group (HKG:2232) Is Reinvesting At Lower Rates Of Return

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Crystal International Group (HKG:2232) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Crystal International Group is:

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

0.12 = US$149m ÷ (US$1.8b - US$575m) (Based on the trailing twelve months to December 2020).

So, Crystal International Group has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Luxury industry.

See our latest analysis for Crystal International Group

Above you can see how the current ROCE for Crystal International Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Crystal International Group here for free.

What Does the ROCE Trend For Crystal International Group Tell Us?

On the surface, the trend of ROCE at Crystal International Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 12% from 16% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Crystal International Group has done well to pay down its current liabilities to 32% 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.

In Conclusion...

In summary, we're somewhat concerned by Crystal International Group's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last three years have experienced a 30% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Crystal International Group does have some risks though, and we've spotted 3 warning signs for Crystal International Group that you might be interested in.

While Crystal International Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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