If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Hing Yip Holdings (HKG:132), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Hing Yip Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = HK$134m ÷ (HK$7.7b - HK$2.7b) (Based on the trailing twelve months to June 2024).
So, Hing Yip Holdings has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 7.0%.
See our latest analysis for Hing Yip 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hing Yip Holdings.
So How Is Hing Yip Holdings' ROCE Trending?
In terms of Hing Yip Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 3.5% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From Hing Yip Holdings' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Hing Yip Holdings is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 22% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Hing Yip Holdings (of which 2 make us uncomfortable!) that you should know about.
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.