We're Watching These Trends At Evergreen Products Group (HKG:1962)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think Evergreen Products Group (HKG:1962) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.082 = HK$71m ÷ (HK$1.7b - HK$821m) (Based on the trailing twelve months to June 2020).

Thus, Evergreen Products Group has an ROCE of 8.2%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 10%.

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'd like to see what analysts are forecasting going forward, you should check out our free report for Evergreen Products Group.

So How Is Evergreen Products Group's ROCE Trending?

We weren't thrilled with the trend because Evergreen Products Group's ROCE has reduced by 64% over the last five years, while the business employed 136% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Evergreen Products Group might not have received a full period of earnings contribution from it.

Another thing to note, Evergreen Products Group has a high ratio of current liabilities to total assets of 49%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To conclude, we've found that Evergreen Products Group is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 4.7% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a separate note, we've found 3 warning signs for Evergreen Products Group you'll probably want to know about.

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