TOM Group (HKG:2383) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Speaking of which, we noticed some great changes in TOM Group's (HKG:2383) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for TOM Group:

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

0.0082 = HK$22m ÷ (HK$3.2b - HK$571m) (Based on the trailing twelve months to June 2022).

So, TOM Group has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Media industry average of 5.8%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of TOM Group, check out these free graphs here.

What Does the ROCE Trend For TOM Group Tell Us?

Shareholders will be relieved that TOM Group has broken into profitability. The company now earns 0.8% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by TOM Group has remained flat over the period. 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. Because in the end, a business can only get so efficient.

The Bottom Line On TOM Group's ROCE

To sum it up, TOM Group is collecting higher returns from the same amount of capital, and that's impressive. However the stock is down a substantial 70% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

TOM Group does have some risks, we noticed 4 warning signs (and 2 which are a bit concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.