If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Although, when we looked at Trio Industrial Electronics Group (HKG:1710), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Trio Industrial Electronics Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0071 = HK$3.4m ÷ (HK$671m - HK$190m) (Based on the trailing twelve months to June 2024).
Thus, Trio Industrial Electronics Group has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 8.0%.
Check out our latest analysis for Trio Industrial Electronics Group
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Trio Industrial Electronics Group has performed in the past in other metrics, you can view this free graph of Trio Industrial Electronics Group's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of Trio Industrial Electronics Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.7% from 17% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Bottom Line
We're a bit apprehensive about Trio Industrial Electronics Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 19% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
If you'd like to know about the risks facing Trio Industrial Electronics Group, we've discovered 1 warning sign that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.