Here’s What’s Happening With Returns At APAC Resources (HKG:1104)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So on that note, APAC Resources (HKG:1104) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for APAC Resources:

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

0.0014 = HK$4.9m ÷ (HK$3.5b - HK$90m) (Based on the trailing twelve months to June 2020).

Thus, APAC Resources has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 5.4%.

See our latest analysis for APAC Resources

Historical performance is a great place to start when researching a stock so above you can see the gauge for APAC Resources' ROCE against it's prior returns. If you're interested in investigating APAC Resources' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The fact that APAC Resources is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.1% on its capital. Not only that, but the company is utilizing 78% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line On APAC Resources' ROCE

In summary, it's great to see that APAC Resources has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 146% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if APAC Resources can keep these trends up, it could have a bright future ahead.

If you want to continue researching APAC Resources, you might be interested to know about the 2 warning signs that our analysis has discovered.

While APAC Resources may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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