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- OTCPK:EVKG
Capital Allocation Trends At Ever-Glory International Group (NASDAQ:EVK) Aren't Ideal
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Ever-Glory International Group (NASDAQ:EVK) and its ROCE trend, we weren't exactly thrilled.
What is 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. To calculate this metric for Ever-Glory International Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = US$3.2m ÷ (US$338m - US$199m) (Based on the trailing twelve months to September 2021).
So, Ever-Glory International Group has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 15%.
View our latest analysis for Ever-Glory International Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Ever-Glory International Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Ever-Glory International Group, check out these free graphs here.
The Trend Of ROCE
In terms of Ever-Glory International Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 12% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Another thing to note, Ever-Glory International Group has a high ratio of current liabilities to total assets of 59%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
What We Can Learn From Ever-Glory International Group's ROCE
To conclude, we've found that Ever-Glory International Group is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 43% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.
Ever-Glory International Group does have some risks, we noticed 4 warning signs (and 1 which is potentially serious) we think you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
About OTCPK:EVKG
Ever-Glory International Group
Manufactures, supplies, and retails apparel in Mainland China, Hong Kong, Germany, the United Kingdom, Europe, Japan, and the United States.
Low with weak fundamentals.