Parkson Retail Group (HKG:3368) Is Doing The Right Things To Multiply Its Share Price

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Speaking of which, we noticed some great changes in Parkson Retail Group's (HKG:3368) returns on capital, so let's have a look.

Understanding 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. The formula for this calculation on Parkson Retail Group is:

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

0.091 = CN¥543m ÷ (CN¥11b - CN¥4.8b) (Based on the trailing twelve months to March 2024).

Therefore, Parkson Retail Group has an ROCE of 9.1%. In absolute terms, that's a low return, but it's much better than the Multiline Retail industry average of 6.4%.

View our latest analysis for Parkson Retail Group

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're interested in investigating Parkson Retail Group's past further, check out this free graph covering Parkson Retail Group's past earnings, revenue and cash flow.

So How Is Parkson Retail Group's ROCE Trending?

You'd find it hard not to be impressed with the ROCE trend at Parkson Retail Group. The figures show that over the last five years, returns on capital have grown by 410%. The company is now earning CN¥0.09 per dollar of capital employed. In regards to capital employed, Parkson Retail Group appears to been achieving more with less, since the business is using 56% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 44% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Parkson Retail Group's ROCE

In summary, it's great to see that Parkson Retail Group has been able to turn things around and earn higher returns on lower amounts of capital. However the stock is down a substantial 83% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

If you want to continue researching Parkson Retail Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Parkson Retail 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.

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