If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Bauhaus International (Holdings) (HKG:483) looks quite promising in regards to its trends of return on capital.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for Bauhaus International (Holdings):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.039 = HK$7.4m ÷ (HK$231m - HK$39m) (Based on the trailing twelve months to September 2024).
Thus, Bauhaus International (Holdings) has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 12%.
View our latest analysis for Bauhaus International (Holdings)
Historical performance is a great place to start when researching a stock so above you can see the gauge for Bauhaus International (Holdings)'s ROCE against it's prior returns. If you'd like to look at how Bauhaus International (Holdings) has performed in the past in other metrics, you can view this free graph of Bauhaus International (Holdings)'s past earnings, revenue and cash flow.
So How Is Bauhaus International (Holdings)'s ROCE Trending?
Like most people, we're pleased that Bauhaus International (Holdings) is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 77%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
The Bottom Line
In a nutshell, we're pleased to see that Bauhaus International (Holdings) has been able to generate higher returns from less capital. Since the stock has returned a solid 92% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Bauhaus International (Holdings) does have some risks though, and we've spotted 1 warning sign for Bauhaus International (Holdings) that you might be interested in.
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.