Returns At Tak Lee Machinery Holdings (HKG:2102) Appear To Be Weighed Down

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Tak Lee Machinery Holdings' (HKG:2102) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Tak Lee Machinery Holdings is:

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).

So, Tak Lee Machinery Holdings has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 3.5% generated by the Trade Distributors industry.

Check out 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.

What Can We Tell From Tak Lee Machinery Holdings' ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 147% in that time. 15% is a pretty standard return, and it provides some comfort knowing that Tak Lee Machinery Holdings has consistently earned this amount. 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.

What We Can Learn From 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. And since the stock has risen strongly over the last three years, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a separate note, we've found 3 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.

If you're looking for stocks to buy, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.