Here’s what worries Tycoon Group Holdings’ return on capital (HKG: 3390)
What are the early trends to look for to identify a stock that could multiply in value over the long term? Typically, we will want to notice a growth trend come back on capital employed (ROCE) and at the same time, a base capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. However, after briefly looking at the numbers, we don’t think Tycoon Holdings Group (HKG:3390) has the makings of a multi-bagger in the future, but let’s see why it might be.
Understanding return on capital employed (ROCE)
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on Tycoon Group Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.016 = HK$4.3 million ÷ (HK$881 million – HK$615 million) (Based on the last twelve months to December 2021).
Thereby, Tycoon Group Holdings has a ROCE of 1.6%. In absolute terms, this is a weak performance and it is also below the healthcare industry average of 9.9%.
Check out our latest analysis for Tycoon Group Holdings
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to investigate Tycoon Group Holdings’ past further, check out this free chart of past profits, revenue and cash flow.
What can we say about the ROCE trend of Tycoon Group Holdings?
On the surface, the ROCE trend at Tycoon Group Holdings does not inspire confidence. To be more specific, ROCE has fallen by 46% over the past four years. However, given that capital employed and revenue have both increased, it appears that the company is currently continuing to grow, following short-term returns. If these investments prove successful, it can bode very well for long-term stock performance.
In this regard, we noticed that the ratio of current liabilities to total assets rose to 70%, which impacted ROCE. If current liabilities hadn’t risen as much as they did, ROCE might actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively financing much of the activity, which may introduce some risk.
In summary, despite lower short-term returns, we are encouraged to see that Tycoon Group Holdings is reinvesting for growth and has thus increased sales. These growth trends have not, however, resulted in returns to growth, as the stock has fallen 18% over the past year. So we think it would be worth taking a closer look at this stock as the trends look encouraging.
Like most businesses, Tycoon Group Holdings comes with some risk, and we have found 1 warning sign of which you should be aware.
Although Tycoon Group Holdings isn’t currently generating the highest returns, we’ve compiled a list of companies that are currently generating over 25% return on equity. look at this free list here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.