What Can The Trends At Parkson Retail Group (HKG:3368) Tell Us About Their Returns?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.015 = CN¥165m ÷ (CN¥14b - CN¥3.4b) (Based on the trailing twelve months to September 2020).

Therefore, Parkson Retail Group has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 7.2%.

View 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 want to delve into the historical earnings, revenue and cash flow of Parkson Retail Group, check out these free graphs here.

What Can We Tell From Parkson Retail Group's ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. 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 2,194% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

In summary, we're delighted to see that Parkson Retail Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 68% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about Parkson Retail Group, we've spotted 3 warning signs, and 1 of them is significant.

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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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