Stock Analysis

Investors Could Be Concerned With G.A. Holdings' (HKG:8126) Returns On Capital

SEHK:8126
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What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at G.A. Holdings (HKG:8126), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for G.A. Holdings:

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

0.10 = HK$96m ÷ (HK$1.8b - HK$821m) (Based on the trailing twelve months to June 2022).

So, G.A. Holdings has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.4% generated by the Retail Distributors industry.

View our latest analysis for G.A. Holdings

roce
SEHK:8126 Return on Capital Employed September 27th 2022

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're interested in investigating G.A. Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at G.A. Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 10%. 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.

On a side note, G.A. Holdings has done well to pay down its current liabilities to 46% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 46% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

In summary, we're somewhat concerned by G.A. Holdings' diminishing returns on increasing amounts of capital. This could explain why the stock has sunk a total of 71% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for G.A. Holdings (of which 1 is potentially serious!) that you should know about.

While G.A. 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.

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.