There are a few key trends to look for if we want to identify the next multi-bagger. 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 EGL Holdings' (HKG:6882) returns on capital, so let's have a 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. To calculate this metric for EGL Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = HK$134m ÷ (HK$799m - HK$348m) (Based on the trailing twelve months to June 2024).
Therefore, EGL Holdings has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 7.0% earned by companies in a similar industry.
Check out our latest analysis for EGL Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for EGL 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 EGL Holdings.
What Does the ROCE Trend For EGL Holdings Tell Us?
We're pretty happy with how the ROCE has been trending at EGL Holdings. The figures show that over the last five years, returns on capital have grown by 900%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 32% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
Another thing to note, EGL Holdings has a high ratio of current liabilities to total assets of 44%. 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 a nutshell, we're pleased to see that EGL Holdings has been able to generate higher returns from less capital. Since the stock has returned a solid 58% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if EGL Holdings can keep these trends up, it could have a bright future ahead.
One more thing, we've spotted 2 warning signs facing EGL Holdings that you might find interesting.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.