Parkson Retail Group (HKG:3368) Shareholders Will Want The ROCE Trajectory To Continue

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, Parkson Retail Group (HKG:3368) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Parkson Retail Group:

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

0.044 = CN¥360m ÷ (CN¥11b - CN¥2.8b) (Based on the trailing twelve months to September 2023).

Therefore, Parkson Retail Group has an ROCE of 4.4%. On its own that's a low return, but compared to the average of 2.8% generated by the Multiline Retail industry, it's much better.

See our latest analysis for Parkson Retail Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Parkson Retail Group's ROCE against it's prior returns. If you'd like to look at how Parkson Retail Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Parkson Retail Group's ROCE Trending?

While there are companies with higher returns on capital out there, we still find the trend at Parkson Retail Group promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 166% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

In Conclusion...

As discussed above, Parkson Retail Group appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has dived 83% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Parkson Retail Group does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.