Returns Are Gaining Momentum At TOM Group (HKG:2383)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. With that in mind, we've noticed some promising trends at TOM Group (HKG:2383) so let's look a bit deeper.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for TOM Group, this is the formula:

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

0.0046 = HK$11m ÷ (HK$3.0b - HK$639m) (Based on the trailing twelve months to December 2021).

Thus, TOM Group has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Media industry average of 7.3%.

See our latest analysis for TOM Group

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

The Trend Of ROCE

TOM Group has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 0.5% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In Conclusion...

To sum it up, TOM Group is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 70% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One final note, you should learn about the 3 warning signs we've spotted with TOM Group (including 2 which are significant) .

While TOM 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.