Perfect Group International Holdings (HKG:3326) Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Perfect Group International Holdings (HKG:3326), it didn't seem to tick all of these boxes.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Perfect Group International Holdings is:

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

0.087 = HK$60m ÷ (HK$869m - HK$179m) (Based on the trailing twelve months to June 2021).

So, Perfect Group International Holdings has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Luxury industry average of 6.7%.

Check out 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?

In terms of Perfect Group International Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 11%, but since then they've fallen to 8.7%. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 21%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 8.7%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Perfect Group International Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 55% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing Perfect Group International Holdings, we've discovered 4 warning signs that you should be aware of.

While Perfect Group International 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.

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.

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