Here's What To Make Of Perfect Group International Holdings' (HKG:3326) Decelerating Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 briefly looking over the numbers, we don't think Perfect Group International Holdings (HKG:3326) 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?

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 Perfect Group International Holdings:

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

0.081 = HK$56m ÷ (HK$873m - HK$179m) (Based on the trailing twelve months to June 2022).

So, Perfect Group International Holdings has an ROCE of 8.1%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 12%.

See our latest analysis for Perfect Group International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Perfect Group International Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Perfect Group International Holdings, check out these free graphs here.

What Can We Tell From Perfect Group International Holdings' ROCE Trend?

The returns on capital haven't changed much for Perfect Group International Holdings in recent years. The company has employed 45% more capital in the last five years, and the returns on that capital have remained stable at 8.1%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

As we've seen above, Perfect Group International Holdings' returns on capital haven't increased but it is reinvesting in the business. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 94% over the last five years. Therefore based on the analysis done in this article, we don't think Perfect Group International Holdings has the makings of a multi-bagger.

Like most companies, Perfect Group International Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.

While Perfect Group International Holdings 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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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.