Amuse Group Holding's (HKG:8545) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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?

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. 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)

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

So, Amuse Group Holding has an ROCE of 5.3%. In absolute terms, that's a low return but it's around the Leisure industry average of 6.3%.

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 Amuse Group Holding's past earnings, revenue and cash flow.

What Does the ROCE Trend For Amuse Group Holding Tell Us?

In terms of Amuse Group Holding's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 14%, but since then they've fallen to 5.3%. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Amuse Group Holding's current liabilities have increased over the last five years to 24% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Amuse Group Holding's ROCE

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 73% 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.

Amuse Group Holding does have some risks though, and we've spotted 2 warning signs for Amuse Group Holding that you might be interested in.

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.