If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 Launch Tech's (HKG:2488) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Launch Tech is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = CN¥335m ÷ (CN¥2.0b - CN¥585m) (Based on the trailing twelve months to December 2024).
Therefore, Launch Tech has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 4.0% earned by companies in a similar industry.
See our latest analysis for Launch Tech
Historical performance is a great place to start when researching a stock so above you can see the gauge for Launch Tech's ROCE against it's prior returns. If you'd like to look at how Launch Tech has performed in the past in other metrics, you can view this free graph of Launch Tech's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Launch Tech has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 24% on its capital. In addition to that, Launch Tech is employing 78% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a related note, the company's ratio of current liabilities to total assets has decreased to 29%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
Our Take On Launch Tech's ROCE
To the delight of most shareholders, Launch Tech has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Launch Tech can keep these trends up, it could have a bright future ahead.
Like most companies, Launch Tech does come with some risks, and we've found 1 warning sign that 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.