Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. 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 UTS Marketing Solutions Holdings' (HKG:6113) returns on capital, so let's have a look.
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 UTS Marketing Solutions Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.32 = RM16m ÷ (RM69m - RM20m) (Based on the trailing twelve months to June 2024).
Thus, UTS Marketing Solutions Holdings has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 6.2%.
See our latest analysis for UTS Marketing Solutions 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 UTS Marketing Solutions Holdings.
How Are Returns Trending?
We're pretty happy with how the ROCE has been trending at UTS Marketing Solutions Holdings. The data shows that returns on capital have increased by 135% over the trailing five years. The company is now earning RM0.3 per dollar of capital employed. In regards to capital employed, UTS Marketing Solutions Holdings appears to been achieving more with less, since the business is using 37% less capital to run its operation. UTS Marketing Solutions Holdings may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 28% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
The Bottom Line On UTS Marketing Solutions Holdings' ROCE
From what we've seen above, UTS Marketing Solutions Holdings has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a solid 77% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a final note, we found 4 warning signs for UTS Marketing Solutions Holdings (1 is a bit unpleasant) you should be aware of.
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.