Taste Gourmet Group (HKG:8371) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Taste Gourmet Group (HKG:8371), it does have a high ROCE right now, but lets see how returns are trending.

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

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 Taste Gourmet Group:

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

0.20 = HK$117m ÷ (HK$835m - HK$239m) (Based on the trailing twelve months to March 2024).

So, Taste Gourmet Group has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 7.1% earned by companies in a similar industry.

See our latest analysis for Taste Gourmet Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Taste Gourmet Group's ROCE against it's prior returns. If you'd like to look at how Taste Gourmet Group has performed in the past in other metrics, you can view this free graph of Taste Gourmet Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Taste Gourmet Group Tell Us?

When we looked at the ROCE trend at Taste Gourmet Group, we didn't gain much confidence. Historically returns on capital were even higher at 31%, but they have dropped over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Taste Gourmet Group. And long term investors must be optimistic going forward because the stock has returned a huge 117% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, Taste Gourmet Group does come with some risks, and we've found 2 warning signs that you should be aware of.

Taste Gourmet Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.