If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Asia Commercial Holdings (HKG:104) looks great, so lets see what the trend can tell us.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Asia Commercial Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = HK$109m ÷ (HK$737m - HK$233m) (Based on the trailing twelve months to September 2024).
So, Asia Commercial Holdings has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 8.9% earned by companies in a similar industry.
View our latest analysis for Asia Commercial Holdings
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're interested in investigating Asia Commercial Holdings' past further, check out this free graph covering Asia Commercial Holdings' past earnings, revenue and cash flow.
What Does the ROCE Trend For Asia Commercial Holdings Tell Us?
Asia Commercial Holdings has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 78%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Asia Commercial Holdings appears to been achieving more with less, since the business is using 24% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
The Bottom Line
From what we've seen above, Asia Commercial Holdings has managed to increase it's returns on capital all the while reducing it's capital base. Considering the stock has delivered 18% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Like most companies, Asia Commercial Holdings does come with some risks, and we've found 4 warning signs that you should be aware of.
Asia Commercial Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.