Analogue Holdings (HKG:1977) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Analogue Holdings (HKG:1977) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Analogue Holdings is:

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

0.15 = HK$306m ÷ (HK$3.9b - HK$1.8b) (Based on the trailing twelve months to December 2020).

Thus, Analogue Holdings has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.8% generated by the Construction industry.

Check out our latest analysis for Analogue Holdings

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

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Analogue Holdings are quite reassuring. Over the last four years, returns on capital employed have risen substantially to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 28%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, Analogue Holdings has a high ratio of current liabilities to total assets of 46%. 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.

In Conclusion...

All in all, it's terrific to see that Analogue Holdings is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 54% return over the last year. In light of that, we think it's worth looking further into this stock because if Analogue Holdings can keep these trends up, it could have a bright future ahead.

If you want to continue researching Analogue Holdings, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Analogue Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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