Here's What's Concerning About Goldlion Holdings' (HKG:533) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Goldlion Holdings (HKG:533) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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 Goldlion Holdings:

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

0.046 = HK$227m ÷ (HK$5.3b - HK$389m) (Based on the trailing twelve months to December 2020).

So, Goldlion Holdings has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 9.2%.

View our latest analysis for Goldlion Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Goldlion Holdings' ROCE against it's prior returns. If you're interested in investigating Goldlion Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Goldlion Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 7.2%, but since then they've fallen to 4.6%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Goldlion Holdings' ROCE

In summary, we're somewhat concerned by Goldlion Holdings' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 15% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Goldlion Holdings (of which 1 makes us a bit uncomfortable!) that you should know about.

While Goldlion Holdings 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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