Returns Are Gaining Momentum At Skyworth Group (HKG:751)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Skyworth Group's (HKG:751) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 Skyworth Group, this is the formula:

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

0.086 = CN¥547m ÷ (CN¥10b - CN¥3.9b) (Based on the trailing twelve months to September 2023).

Therefore, Skyworth Group has an ROCE of 8.6%. On its own, that's a low figure but it's around the 7.7% average generated by the Consumer Durables industry.

View our latest analysis for Skyworth Group

In the above chart we have measured Skyworth Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Skyworth Group.

What Does the ROCE Trend For Skyworth Group Tell Us?

Skyworth Group has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 303%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Skyworth Group appears to been achieving more with less, since the business is using 72% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

One more thing to note, Skyworth Group has decreased current liabilities to 38% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Skyworth Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Skyworth Group's ROCE

In summary, it's great to see that Skyworth Group has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a solid 83% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

While Skyworth 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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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.