Capital Allocation Trends At Trigiant Group (HKG:1300) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Trigiant Group (HKG:1300) 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 that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Trigiant Group, this is the formula:

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

0.046 = CN¥157m ÷ (CN¥5.4b - CN¥1.9b) (Based on the trailing twelve months to December 2020).

So, Trigiant Group has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 7.0%.

See our latest analysis for Trigiant Group

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

What Can We Tell From Trigiant Group's ROCE Trend?

On the surface, the trend of ROCE at Trigiant Group doesn't inspire confidence. Around five years ago the returns on capital were 16%, 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.

What We Can Learn From Trigiant Group's ROCE

We're a bit apprehensive about Trigiant Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 33% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a separate note, we've found 2 warning signs for Trigiant Group you'll probably want to know about.

While Trigiant Group 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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