To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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, we've noticed some promising trends at Perennial International (HKG:725) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
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 Perennial International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = HK$27m ÷ (HK$463m - HK$44m) (Based on the trailing twelve months to June 2024).
So, Perennial International has an ROCE of 6.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.3%.
See our latest analysis for Perennial International
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 Perennial International.
What Can We Tell From Perennial International's ROCE Trend?
We're pretty happy with how the ROCE has been trending at Perennial International. The figures show that over the last five years, returns on capital have grown by 556%. 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, Perennial International appears to been achieving more with less, since the business is using 34% 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.
In Conclusion...
In a nutshell, we're pleased to see that Perennial International has been able to generate higher returns from less capital. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.
On a separate note, we've found 3 warning signs for Perennial International you'll probably want to know about.
While Perennial International isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.