Has Activation Group Holdings (HKG:9919) Got What It Takes To Become A Multi-Bagger?

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Activation Group Holdings (HKG:9919) 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 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. Analysts use this formula to calculate it for Activation Group Holdings:

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

0.073 = CN¥27m ÷ (CN¥474m - CN¥107m) (Based on the trailing twelve months to June 2020).

Therefore, Activation Group Holdings has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Media industry average of 10%.

Check out our latest analysis for Activation Group Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Activation Group Holdings, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at Activation Group Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 32% over the last three years. 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.

On a side note, Activation Group Holdings has done well to pay down its current liabilities to 23% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Activation Group Holdings' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Activation Group Holdings have fallen, meanwhile the business is employing more capital than it was three years ago. It should come as no surprise then that the stock has fallen 45% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Activation Group Holdings we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

While Activation Group Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.
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