Hong Kong Shanghai Alliance Holdings (HKG:1001) Might Have The Makings Of A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Hong Kong Shanghai Alliance Holdings (HKG:1001) so let's look a bit deeper.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Understanding 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. To calculate this metric for Hong Kong Shanghai Alliance Holdings, this is the formula:

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

0.12 = HK$184m ÷ (HK$2.6b - HK$1.1b) (Based on the trailing twelve months to March 2025).

Thus, Hong Kong Shanghai Alliance Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.9% generated by the Trade Distributors industry.

See our latest analysis for Hong Kong Shanghai Alliance Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hong Kong Shanghai Alliance Holdings' ROCE against it's prior returns. If you'd like to look at how Hong Kong Shanghai Alliance Holdings has performed in the past in other metrics, you can view this free graph of Hong Kong Shanghai Alliance Holdings' past earnings, revenue and cash flow.

What Does the ROCE Trend For Hong Kong Shanghai Alliance Holdings Tell Us?

Hong Kong Shanghai Alliance Holdings is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 1,010% in that same time. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, Hong Kong Shanghai Alliance Holdings' current liabilities are still rather high at 41% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Hong Kong Shanghai Alliance Holdings' ROCE

To sum it up, Hong Kong Shanghai Alliance Holdings is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 114% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Hong Kong Shanghai Alliance Holdings does have some risks, we noticed 4 warning signs (and 1 which can't be ignored) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.