The Return Trends At New Century Group Hong Kong (HKG:234) Look Promising

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at New Century Group Hong Kong (HKG:234) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for New Century Group Hong Kong:

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

0.0049 = HK$9.6m ÷ (HK$2.1b - HK$143m) (Based on the trailing twelve months to March 2021).

Therefore, New Century Group Hong Kong has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 2.0%.

Check out our latest analysis for New Century Group Hong Kong

Historical performance is a great place to start when researching a stock so above you can see the gauge for New Century Group Hong Kong's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of New Century Group Hong Kong, check out these free graphs here.

So How Is New Century Group Hong Kong's ROCE Trending?

The fact that New Century Group Hong Kong is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 0.5% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, New Century Group Hong Kong is utilizing 22% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line On New Century Group Hong Kong's ROCE

Long story short, we're delighted to see that New Century Group Hong Kong's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 49% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 2 warning signs we've spotted with New Century Group Hong Kong (including 1 which makes us a bit uncomfortable) .

While New Century Group Hong Kong 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. 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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