Amuse Group Holding (HKG: 8545) hopes to make its capital profitable

What are the early trends we should look for to identify a stock that could multiply in value over the long term? First, we would like to identify a growth to recover on capital employed (ROCE) and in parallel, 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 Amuse Group Holding (HKG: 8545), it didn’t seem to tick all of those boxes.

Understanding Return on Capital Employed (ROCE)

For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. Analysts use this formula to calculate it for Amuse Group Holding:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.05 = HK $ 9.1million ÷ (HK $ 221million – HK $ 41million) (Based on the last twelve months up to June 2021).

So, Amuse Group Holding has a ROCE of 5.0%. On its own, this is a low return on capital, but it is in line with industry average returns of 5.4%.

See our latest analysis for Amuse Group Holding

SEHK: 8,545 Return on capital employed September 17, 2021

Historical performance is a great place to start when looking for a stock. So you can see above the gauge of the ROCE of Amuse Group Holding compared to its past returns. If you want to delve into the history of Amuse Group Holding’s earnings, income and cash flow, check out these free graphics here.

How are the returns evolving?

On the surface, the ROCE trend at Amuse Group Holding does not inspire confidence. About five years ago, returns on capital were 44%, but since then they have fallen to 5.0%. Although, as income and the amount of assets used in the business have increased, it could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. If these investments prove to be successful, it can bode very well for long-term stock performance.

By the way, Amuse Group Holding has done well in reducing its current liabilities to 19% of total assets. So we could link some of that to the decrease in ROCE. In effect, this means that their suppliers or short-term creditors fund the business less, which reduces some elements of risk. Since the company essentially finances a larger portion of its operations with its own money, you could argue that this has made the company less efficient at generating ROCE.

Amuse Group Holding’s ROCE result

Although returns on capital have declined in the short term, we find promise that both revenue and capital employed have increased for Amuse Group Holding. Despite these promising trends, the stock has slumped 88% in the past three years, so other factors could hurt the company’s outlook. Therefore, we suggest that you research the stock more to find out more about the company.

If you want to know more about Amuse Group Holding, we have spotted 4 warning signs, and 1 of them makes us a little uncomfortable.

If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.

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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 shares 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 the mentioned stocks.
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