SU Group Holdings' (NASDAQ:SUGP) Returns On Capital Are Heading Higher

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. So on that note, SU Group Holdings (NASDAQ:SUGP) looks quite promising in regards to its trends of return on capital.

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What Is 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. Analysts use this formula to calculate it for SU Group Holdings:

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

0.11 = HK$12m ÷ (HK$157m - HK$53m) (Based on the trailing twelve months to September 2024).

Thus, SU Group Holdings has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

Check out our latest analysis for SU Group Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for SU Group Holdings' ROCE against it's prior returns. If you're interested in investigating SU Group Holdings' past further, check out this free graph covering SU Group Holdings' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

SU Group Holdings is displaying some positive trends. Over the last three years, returns on capital employed have risen substantially to 11%. The amount of capital employed has increased too, by 126%. So we're very much inspired by what we're seeing at SU Group Holdings thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 34%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On SU Group Holdings' ROCE

All in all, it's terrific to see that SU Group Holdings is reaping the rewards from prior investments and is growing its capital base. And since the stock has dived 71% over the last year, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

SU Group Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

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.