If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Looking at Home Control International (HKG:1747), it does have a high ROCE right now, but lets see how returns are trending.
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. The formula for this calculation on Home Control International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = US$7.0m ÷ (US$70m - US$43m) (Based on the trailing twelve months to June 2024).
Thus, Home Control International has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 13%.
Check out our latest analysis for Home Control International
In the above chart we have measured Home Control International's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Home Control International .
What Can We Tell From Home Control International's ROCE Trend?
Over the past five years, Home Control International's ROCE has remained relatively flat while the business is using 27% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. But we have to give it to Home Control International because the returns on the capital it is employing are still high in relative terms.
Another thing to note, Home Control International has a high ratio of current liabilities to total assets of 62%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
In summary, Home Control International isn't reinvesting funds back into the business and returns aren't growing. And in the last five years, the stock has given away 26% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
Home Control International does have some risks, we noticed 3 warning signs (and 2 which are significant) we think you should know about.
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.