Returns On Capital At Parkson Retail Group (HKG:3368) Have Hit The Brakes

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Parkson Retail Group (HKG:3368) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Parkson Retail Group, this is the formula:

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

0.047 = CN¥397m ÷ (CN¥11b - CN¥2.4b) (Based on the trailing twelve months to September 2024).

Therefore, Parkson Retail Group has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 6.2%.

Check out 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 Parkson Retail Group's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're a bit concerned with the trends, because the business is applying 32% less capital than it was five years ago and returns on that capital have stayed flat. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

The Bottom Line

It's a shame to see that Parkson Retail Group is effectively shrinking in terms of its capital base. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 75% over the last five years. Therefore based on the analysis done in this article, we don't think Parkson Retail Group has the makings of a multi-bagger.

If you want to continue researching Parkson Retail Group, you might be interested to know about the 2 warning signs 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.