The Returns At AEON Stores (Hong Kong) (HKG:984) Provide Us With Signs Of What's To Come

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at AEON Stores (Hong Kong) (HKG:984), it didn't seem to tick all of these boxes.

What is 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. To calculate this metric for AEON Stores (Hong Kong), this is the formula:

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

0.04 = HK$188m ÷ (HK$7.9b - HK$3.2b) (Based on the trailing twelve months to June 2020).

Thus, AEON Stores (Hong Kong) has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 7.2%.

See our latest analysis for AEON Stores (Hong Kong)

Historical performance is a great place to start when researching a stock so above you can see the gauge for AEON Stores (Hong Kong)'s ROCE against it's prior returns. If you'd like to look at how AEON Stores (Hong Kong) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is AEON Stores (Hong Kong)'s ROCE Trending?

On the surface, the trend of ROCE at AEON Stores (Hong Kong) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.0% from 10% five years ago. However it looks like AEON Stores (Hong Kong) might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, AEON Stores (Hong Kong) has done well to pay down its current liabilities to 41% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On AEON Stores (Hong Kong)'s ROCE

In summary, AEON Stores (Hong Kong) is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 62% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for AEON Stores (Hong Kong) (of which 1 is a bit concerning!) that you should know about.

While AEON Stores (Hong Kong) 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.

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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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