To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 Ausupreme International Holdings (HKG:2031) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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. The formula for this calculation on Ausupreme International Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = HK$34m ÷ (HK$234m - HK$50m) (Based on the trailing twelve months to September 2024).
Therefore, Ausupreme International Holdings has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 14% generated by the Retail Distributors industry.
Check out our latest analysis for Ausupreme International Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Ausupreme International Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Ausupreme International Holdings.
What Can We Tell From Ausupreme International Holdings' ROCE Trend?
Things have been pretty stable at Ausupreme International Holdings, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Ausupreme International Holdings in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
The Key Takeaway
In a nutshell, Ausupreme International Holdings has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 44% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Ausupreme International Holdings has the makings of a multi-bagger.
Like most companies, Ausupreme International Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.