Investors Will Want Gemilang International's (HKG:6163) Growth In ROCE To Persist

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Gemilang International (HKG:6163) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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 Gemilang International is:

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

0.016 = US$324k ÷ (US$36m - US$15m) (Based on the trailing twelve months to April 2023).

So, Gemilang International has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 7.4%.

See our latest analysis for Gemilang International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gemilang International's ROCE against it's prior returns. If you'd like to look at how Gemilang International 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

Gemilang International has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 1.6% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Gemilang International has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

One more thing to note, Gemilang International has decreased current liabilities to 43% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

What We Can Learn From Gemilang International's ROCE

As discussed above, Gemilang International appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Although the company may be facing some issues elsewhere since the stock has plunged 83% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

On a final note, we've found 2 warning signs for Gemilang International that we think you should be aware of.

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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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.