There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Smart-Core Holdings (HKG:2166) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Smart-Core Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = HK$121m ÷ (HK$1.7b - HK$830m) (Based on the trailing twelve months to December 2023).
Therefore, Smart-Core Holdings has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 7.5% it's much better.
View our latest analysis for Smart-Core Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Smart-Core Holdings' ROCE against it's prior returns. If you're interested in investigating Smart-Core Holdings' past further, check out this free graph covering Smart-Core Holdings' past earnings, revenue and cash flow.
What Can We Tell From Smart-Core Holdings' ROCE Trend?
On the surface, the trend of ROCE at Smart-Core Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 19% over the last five years. 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.
On a side note, Smart-Core Holdings' current liabilities are still rather high at 48% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
In Conclusion...
In summary, we're somewhat concerned by Smart-Core Holdings' diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 12% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
Smart-Core Holdings does have some risks though, and we've spotted 2 warning signs for Smart-Core Holdings that you might be interested in.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com