Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at TOM Group (HKG:2383) and its trend of ROCE, we really liked what we saw.
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).
Therefore, TOM Group has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Media industry average of 9.4%.
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.
The Trend Of ROCE
Shareholders will be relieved that TOM Group has broken into profitability. The company now earns 0.5% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
To bring it all together, TOM Group has done well to increase the returns it's generating from its capital employed. Given the stock has declined 57% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
TOM Group does have some risks, we noticed 3 warning signs (and 2 which are significant) we think you should know about.
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.