Should You Be Impressed By A & S Group (Holdings)'s (HKG:1737) Returns on Capital?

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

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 A & S Group (Holdings) is:

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

0.035 = HK$7.9m ÷ (HK$315m - HK$90m) (Based on the trailing twelve months to September 2020).

Therefore, A & S Group (Holdings) has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Logistics industry average of 7.7%.

View 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 want to delve into the historical earnings, revenue and cash flow of A & S Group (Holdings), check out these free graphs here.

What Can We Tell From A & S Group (Holdings)'s ROCE Trend?

When we looked at the ROCE trend at A & S Group (Holdings), we didn't gain much confidence. To be more specific, ROCE has fallen from 55% over the last five years. 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, A & S Group (Holdings) has done well to pay down its current liabilities to 28% of total assets. That could partly explain why the ROCE has dropped. 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.

Our Take On A & S Group (Holdings)'s ROCE

In summary, we're somewhat concerned by A & S Group (Holdings)'s diminishing returns on increasing amounts of capital.

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

While A & S Group (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.

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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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