Why You Should Care About Activation Group Holdings' (HKG:9919) Strong Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. So, when we ran our eye over Activation Group Holdings' (HKG:9919) trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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

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

0.29 = CN¥96m ÷ (CN¥658m - CN¥325m) (Based on the trailing twelve months to June 2023).

Thus, Activation Group Holdings has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 8.7% earned by companies in a similar industry.

See our latest analysis for Activation Group Holdings

Above you can see how the current ROCE for Activation Group Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Activation Group Holdings.

So How Is Activation Group Holdings' ROCE Trending?

Activation Group Holdings deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 29% and the business has deployed 122% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Activation Group Holdings can keep this up, we'd be very optimistic about its future.

On a side note, Activation Group Holdings has done well to reduce current liabilities to 49% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. Although because current liabilities are still 49%, some of that risk is still prevalent.

The Bottom Line On Activation Group Holdings' ROCE

Activation Group Holdings has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has followed suit returning a meaningful 88% to shareholders over the last three years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Activation Group Holdings does have some risks though, and we've spotted 2 warning signs for Activation Group Holdings that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.