Returns On Capital At Golden Throat Holdings Group (HKG:6896) Paint A Concerning Picture

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Golden Throat Holdings Group (HKG:6896), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Golden Throat Holdings Group, this is the formula:

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

0.11 = CN¥139m ÷ (CN¥1.7b - CN¥460m) (Based on the trailing twelve months to December 2020).

Thus, Golden Throat Holdings Group has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10.0% generated by the Personal Products industry.

Check out our latest analysis for Golden Throat Holdings Group

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

How Are Returns Trending?

In terms of Golden Throat Holdings Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 19% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

Our Take On Golden Throat Holdings Group's ROCE

We're a bit apprehensive about Golden Throat Holdings Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last five years have experienced a 69% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 2 warning signs for Golden Throat Holdings Group that we think you should be aware of.

While Golden Throat Holdings 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.

When trading Golden Throat Holdings Group or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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