Returns on capital at SG Group Holdings (HKG:1657) Paint a worrying picture

What are the early trends to look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; first growth come back on capital employed (ROCE) and on the other hand, growth amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. However, after investigating SG Holdings Group (HKG:1657), we don’t think current trends fit the mold of a multi-bagger.

What is 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 SG Group Holdings is:

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

0.009 = HK$1.2 million ÷ (HK$151 million – HK$22 million) (Based on the last twelve months to April 2022).

Therefore, SG Group Holdings posted a ROCE of 0.9%. In absolute terms, this is a weak return and it is also below the luxury industry average of 10%.

Discover our latest analysis for SG Group Holdings

SEHK:1657 Return on capital employed September 13, 2022

Historical performance is a great starting point when researching a stock. So you can see SG Group Holdings’ ROCE gauge above compared to its past returns. If you want to dive deep into the earnings, revenue and cash flow history of SG Group Holdings, check out these free graphics here.

What is the return trend?

In terms of historical movements of SG Group Holdings ROCE, the trend is not fantastic. To be more specific, ROCE has fallen by 37% over the past five 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. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long term.

In conclusion…

While yields have fallen for SG Group Holdings lately, we are encouraged to see that sales are increasing and the company is reinvesting in its operations. In light of this, the stock has only gained 24% over the past five years. Therefore, we recommend that you take a closer look at this stock to confirm if it has the makings of a good investment.

SG Group Holdings has risks, we noticed 4 warning signs (and 1 that shouldn’t be ignored) that we think you should know about.

Although SG Group Holdings does not get the highest return, check this free list of companies that achieve high returns on equity with strong balance sheets.

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.

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