A & S Group (Holdings) (HKG:1737) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after briefly looking over the numbers, we don't think A & S Group (Holdings) (HKG:1737) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 A & S Group (Holdings):

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

0.056 = HK$14m ÷ (HK$381m - HK$127m) (Based on the trailing twelve months to September 2022).

Thus, A & S Group (Holdings) has an ROCE of 5.6%. On its own, that's a low figure but it's around the 7.0% average generated by the Logistics industry.

See our latest analysis for A & S Group (Holdings)

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

SWOT Analysis for A & S Group (Holdings)

So How Is A & S Group (Holdings)'s ROCE Trending?

When we looked at the ROCE trend at A & S Group (Holdings), we didn't gain much confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 5.6%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On A & S Group (Holdings)'s ROCE

In summary, despite lower returns in the short term, we're encouraged to see that A & S Group (Holdings) is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 34% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know about the risks facing A & S Group (Holdings), we've discovered 4 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.