Amuse Group Holding (HKG:8545) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Amuse Group Holding (HKG:8545), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Amuse Group Holding:

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

0.061 = HK$11m ÷ (HK$231m - HK$44m) (Based on the trailing twelve months to December 2022).

Thus, Amuse Group Holding has an ROCE of 6.1%. Even though it's in line with the industry average of 5.7%, it's still a low return by itself.

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.

The Trend Of ROCE

In terms of Amuse Group Holding's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 35% 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.

On a side note, Amuse Group Holding has done well to pay down its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, Amuse Group Holding is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 70% in the last three years. 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: We've identified 4 warning signs with Amuse Group Holding (at least 2 which make us uncomfortable) , and understanding these would certainly be useful.

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.