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? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 investigating Perfect Group International Holdings (HKG:3326), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Perfect Group International Holdings, this is the formula:

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 around the Luxury industry average of 7.6%.

View 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?

On the surface, the trend of ROCE at Perfect Group International Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.7% from 11% 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.

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%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Perfect Group International Holdings' ROCE

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. Investors haven't taken kindly to these developments, since the stock has declined 67% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

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.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.