Our Take On The Returns On Capital At Tak Lee Machinery Holdings (HKG:2102)

By
Simply Wall St
Published
January 06, 2021

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 ran our eye over Tak Lee Machinery Holdings' (HKG:2102) trend of ROCE, we liked what we saw.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Tak Lee Machinery Holdings, this is the formula:

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

0.15 = HK$65m ÷ (HK$540m - HK$114m) (Based on the trailing twelve months to July 2020).

Therefore, Tak Lee Machinery Holdings has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Trade Distributors industry average of 5.4% it's much better.

View our latest analysis for Tak Lee Machinery Holdings

SEHK:2102 Return on Capital Employed January 7th 2021

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're interested in investigating Tak Lee Machinery Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

While the returns on capital are good, they haven't moved much. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 115% in that time. 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 Bottom Line On Tak Lee Machinery Holdings' ROCE

To sum it up, Tak Lee Machinery Holdings has simply been reinvesting capital steadily, at those decent rates of return. However, despite the favorable fundamentals, the stock has fallen 21% over the last three years, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

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

While Tak Lee Machinery 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. 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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