We're Watching These Trends At E. Bon Holdings (HKG:599)

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think E. Bon Holdings (HKG:599) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on E. Bon Holdings is:

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

0.041 = HK$21m ÷ (HK$729m - HK$211m) (Based on the trailing twelve months to September 2020).

Thus, E. Bon Holdings has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 5.4%.

Check out our latest analysis for E. Bon Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for E. Bon Holdings' ROCE against it's prior returns. If you'd like to look at how E. Bon Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at E. Bon Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 4.1%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

We're a bit apprehensive about E. Bon Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 40% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing E. Bon Holdings we've found 4 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While E. Bon 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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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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