Amuse Group Holding (HKG:8545) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Amuse Group Holding (HKG:8545) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. The formula for this calculation on Amuse Group Holding is:

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

0.053 = HK$10m ÷ (HK$257m - HK$61m) (Based on the trailing twelve months to September 2023).

Thus, Amuse Group Holding has an ROCE of 5.3%. On its own, that's a low figure but it's around the 6.1% average generated by the Leisure industry.

See our latest analysis for Amuse Group Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Amuse Group Holding's ROCE against it's prior returns. If you'd like to look at how Amuse Group Holding has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Amuse Group Holding's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 14% over the last five years. However it looks like Amuse Group Holding might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 24%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.3%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

To conclude, we've found that Amuse Group Holding is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 84% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Amuse Group Holding has the makings of a multi-bagger.

One more thing to note, we've identified 2 warning signs with Amuse Group Holding and understanding these should be part of your investment process.

While Amuse Group Holding 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.