Stock Analysis

G.A. Holdings (HKG:8126) Is Experiencing Growth In Returns On Capital

SEHK:8126
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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, G.A. Holdings (HKG:8126) looks quite promising in regards to its trends of return on capital.

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 G.A. Holdings is:

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

0.16 = HK$147m ÷ (HK$1.7b - HK$741m) (Based on the trailing twelve months to June 2021).

Thus, G.A. Holdings has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Retail Distributors industry average of 4.4% it's much better.

View our latest analysis for G.A. Holdings

roce
SEHK:8126 Return on Capital Employed October 26th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for G.A. Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of G.A. Holdings, check out these free graphs here.

What Does the ROCE Trend For G.A. Holdings Tell Us?

G.A. Holdings is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 70%. So we're very much inspired by what we're seeing at G.A. Holdings thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 44% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

What We Can Learn From G.A. Holdings' ROCE

All in all, it's terrific to see that G.A. Holdings is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 51% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found 2 warning signs for G.A. Holdings that we think you should be aware of.

While G.A. Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Valuation is complex, but we're helping make it simple.

Find out whether G.A. Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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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