Returns On Capital Signal Tricky Times Ahead For Evergreen Products Group (HKG:1962)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Evergreen Products Group (HKG:1962) 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. Analysts use this formula to calculate it for Evergreen Products Group:

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

0.09 = HK$81m ÷ (HK$1.6b - HK$734m) (Based on the trailing twelve months to December 2023).

Therefore, Evergreen Products Group has an ROCE of 9.0%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 12%.

See our latest analysis for Evergreen Products Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Evergreen Products Group's ROCE against it's prior returns. If you're interested in investigating Evergreen Products Group's past further, check out this free graph covering Evergreen Products Group's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Evergreen Products Group doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Evergreen Products Group's current liabilities are still rather high at 45% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Evergreen Products Group's ROCE

We're a bit apprehensive about Evergreen Products Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 69% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Evergreen Products Group (including 2 which are a bit concerning) .

While Evergreen Products 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.

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