Evergreen Products Group (HKG:1962) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at Evergreen Products Group (HKG:1962) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Evergreen Products Group, this is the formula:

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

0.038 = HK$36m ÷ (HK$1.7b - HK$777m) (Based on the trailing twelve months to June 2021).

So, Evergreen Products Group has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 12%.

Check out our latest analysis for Evergreen Products Group

In the above chart we have measured Evergreen Products Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

When we looked at the ROCE trend at Evergreen Products Group, we didn't gain much confidence. Around five years ago the returns on capital were 29%, but since then they've fallen to 3.8%. 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.

On a side note, Evergreen Products Group has done well to pay down its current liabilities to 46% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 46% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Evergreen Products Group 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 17% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Evergreen Products Group does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those make us uncomfortable...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.