Perennial International (HKG:725) Is Doing The Right Things To Multiply Its Share Price

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Perennial International (HKG:725) looks quite promising in regards to its trends of return on capital.

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 Perennial International, this is the formula:

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

0.064 = HK$27m ÷ (HK$455m - HK$39m) (Based on the trailing twelve months to December 2023).

Therefore, Perennial International has an ROCE of 6.4%. On its own, that's a low figure but it's around the 7.0% average generated by the Electrical industry.

Check out our latest analysis for Perennial International

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Perennial International's past further, check out this free graph covering Perennial International's past earnings, revenue and cash flow.

What Can We Tell From Perennial International's ROCE Trend?

It's great to see that Perennial International has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Perennial International is using 33% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Perennial International could be selling under-performing assets since the ROCE is improving.

The Bottom Line

From what we've seen above, Perennial International has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 47% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 2 warning signs for Perennial International you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

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