Here's What To Make Of Tak Lee Machinery Holdings' (HKG:2102) Decelerating Rates Of Return

If you're looking for a multi-bagger, there's a few things to 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. That's why when we briefly looked at Tak Lee Machinery Holdings' (HKG:2102) ROCE trend, we were pretty happy with what we saw.

What is 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 Tak Lee Machinery Holdings:

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

0.15 = HK$66m ÷ (HK$557m - HK$112m) (Based on the trailing twelve months to January 2021).

Thus, Tak Lee Machinery Holdings has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 3.6% generated by the Trade Distributors industry.

See our latest analysis for Tak Lee Machinery Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tak Lee Machinery Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Tak Lee Machinery Holdings, check out these free graphs here.

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 147% more capital into its operations. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Key Takeaway

In the end, Tak Lee Machinery Holdings has proven its ability to adequately reinvest capital at good rates of return. However, over the last three years, the stock has only delivered a 2.0% return to shareholders who held over that period. So to determine if Tak Lee Machinery Holdings is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

On a separate note, we've found 2 warning signs for Tak Lee Machinery Holdings you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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