To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Apex Ace Holding's (HKG:6036) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Apex Ace Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = HK$57m ÷ (HK$1.2b - HK$856m) (Based on the trailing twelve months to June 2024).
Thus, Apex Ace Holding has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Electronic industry.
Check out our latest analysis for Apex Ace Holding
Historical performance is a great place to start when researching a stock so above you can see the gauge for Apex Ace Holding's ROCE against it's prior returns. If you're interested in investigating Apex Ace Holding's past further, check out this free graph covering Apex Ace Holding's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Apex Ace Holding has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 389% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 71% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.
The Key Takeaway
To bring it all together, Apex Ace Holding has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 276% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Apex Ace Holding can keep these trends up, it could have a bright future ahead.
If you'd like to know more about Apex Ace Holding, we've spotted 2 warning signs, and 1 of them is concerning.
While Apex Ace Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.