The Returns On Capital At Steve Leung Design Group (HKG:2262) Don't Inspire Confidence

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Having said that, from a first glance at Steve Leung Design Group (HKG:2262) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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 Steve Leung Design Group, this is the formula:

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

0.10 = HK$50m ÷ (HK$688m - HK$187m) (Based on the trailing twelve months to June 2021).

Thus, Steve Leung Design Group has an ROCE of 10.0%. On its own, that's a low figure but it's around the 9.1% average generated by the Consumer Services industry.

View our latest analysis for Steve Leung Design Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Steve Leung Design Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Steve Leung Design Group Tell Us?

When we looked at the ROCE trend at Steve Leung Design Group, we didn't gain much confidence. Around five years ago the returns on capital were 45%, but since then they've fallen to 10.0%. However it looks like Steve Leung Design Group 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 related note, Steve Leung Design Group has decreased its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Steve Leung Design Group's ROCE

Bringing it all together, while we're somewhat encouraged by Steve Leung Design Group's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 18% in the last three years. Therefore based on the analysis done in this article, we don't think Steve Leung Design Group has the makings of a multi-bagger.

One final note, you should learn about the 5 warning signs we've spotted with Steve Leung Design Group (including 1 which is a bit concerning) .

While Steve Leung Design Group 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. 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.