Shareholders Would Enjoy A Repeat Of Launch Tech's (HKG:2488) Recent Growth In Returns

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of Launch Tech (HKG:2488) we really liked what we saw.

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. To calculate this metric for Launch Tech, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.26 = CN¥291m ÷ (CN¥1.9b - CN¥775m) (Based on the trailing twelve months to June 2024).

Thus, Launch Tech has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 6.0% earned by companies in a similar industry.

See our latest analysis for Launch Tech

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're interested in investigating Launch Tech's past further, check out this free graph covering Launch Tech's past earnings, revenue and cash flow.

The Trend Of ROCE

Launch Tech is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 139% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

Another thing to note, Launch Tech has a high ratio of current liabilities to total assets of 41%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Launch Tech's ROCE

To bring it all together, Launch Tech has done well to increase the returns it's generating from its capital employed. Since the stock has returned a solid 58% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. 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.

On a final note, we've found 2 warning signs for Launch Tech that we think you should be aware of.

Launch Tech is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.