Returns on capital at Guoco Group (HKG: 53) do not inspire confidence
Did you know that certain financial measures can provide clues about a potential multi-bagger? Generally, we will want to notice a growing trend to return to on capital employed (ROCE) and at the same time, a based capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we considered Guoco Group (HKG: 53), he didn’t seem to tick all of those boxes.
Return on capital employed (ROCE): what is it?
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 Guoco Group is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.0069 = US $ 104 million ÷ (US $ 17 billion – US $ 1.9 billion) (Based on the last twelve months up to June 2021).
Therefore, Guoco Group has a ROCE of 0.7%. At the end of the day, this is a low yield and it is below the industrials industry average of 3.3%.
See our latest analysis for Guoco Group
Although the past is not representative 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 more about Guoco Group’s past, check out this free graph of past income, income and cash flow.
So what is the Guoco group’s ROCE trend?
In terms of Guoco Group’s historic ROCE movements, the trend is not great. Over the past five years, return on capital has fallen to 0.7%, down from 3.9% five years ago. And since incomes have fallen while employing more capital, we would be cautious. This could mean that the company is losing its competitive advantage or market share, because while more money is invested in companies, it actually produces a lower return – “less bang for the buck” per se.
Our opinion on the Guoco group’s ROCE
In summary, we are somewhat concerned about Guoco Group’s diminishing returns on increasing amounts of capital. Despite this, the stock offered a 15% return to shareholders who have held it for the past five years. Either way, we’re not big fans of current trends so we think you might find better investments elsewhere.
If you want to know some of the risks Guoco Group faces, we have found 2 warning signs (1 is a bit nasty!) Which you should be aware of before investing here.
While Guoco Group does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out 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 using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.