Should You Be Impressed By Amuse Group Holding's (HKG:8545) Returns on Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

Understanding Return On Capital Employed (ROCE)

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)

0.078 = HK$14m ÷ (HK$212m - HK$34m) (Based on the trailing twelve months to December 2020).

Thus, Amuse Group Holding has an ROCE of 7.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.8%.

View 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.

What Can We Tell From Amuse Group Holding's ROCE Trend?

When we looked at the ROCE trend at Amuse Group Holding, we didn't gain much confidence. Around four years ago the returns on capital were 44%, but since then they've fallen to 7.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Amuse Group Holding has decreased its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

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. Although the market must be expecting these trends to improve because the stock has gained 22% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Amuse Group Holding does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

While Amuse Group Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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