Here's What's Concerning About Tycoon Group Holdings' (HKG:3390) 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Tycoon Group Holdings (HKG:3390) 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)

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. The formula for this calculation on Tycoon Group Holdings is:

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

0.016 = HK$4.3m ÷ (HK$881m - HK$615m) (Based on the trailing twelve months to December 2021).

Thus, Tycoon Group Holdings has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 9.9%.

View our latest analysis for Tycoon Group Holdings

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 Tycoon Group Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Tycoon Group Holdings' ROCE Trend?

On the surface, the trend of ROCE at Tycoon Group Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 46% over the last four 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 70%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Tycoon Group Holdings is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 18% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Tycoon Group Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While Tycoon Group Holdings 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.