We Like These Underlying Return On Capital Trends At AP Rentals Holdings (HKG:1496)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, AP Rentals Holdings (HKG:1496) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for AP Rentals Holdings, this is the formula:

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

0.022 = HK$5.5m ÷ (HK$323m - HK$76m) (Based on the trailing twelve months to September 2023).

So, AP Rentals Holdings has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 5.1%.

See our latest analysis for AP Rentals Holdings

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'd like to look at how AP Rentals Holdings has performed in the past in other metrics, you can view this free graph of AP Rentals Holdings' past earnings, revenue and cash flow.

How Are Returns Trending?

While there are companies with higher returns on capital out there, we still find the trend at AP Rentals Holdings promising. The figures show that over the last five years, ROCE has grown 16,997% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

As discussed above, AP Rentals Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 62% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching AP Rentals Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.

While AP Rentals Holdings 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. 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.