Stock Analysis

Here's What Pizu Group Holdings' (HKG:8053) Strong Returns On Capital Means

SEHK:8053
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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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Pizu Group Holdings' (HKG:8053) trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Pizu Group Holdings is:

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

0.40 = CN¥506m ÷ (CN¥1.8b - CN¥559m) (Based on the trailing twelve months to December 2020).

Therefore, Pizu Group Holdings has an ROCE of 40%. In absolute terms that's a great return and it's even better than the Construction industry average of 10%.

View our latest analysis for Pizu Group Holdings

roce
SEHK:8053 Return on Capital Employed March 8th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pizu Group Holdings' ROCE against it's prior returns. If you're interested in investigating Pizu Group Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Pizu Group Holdings' ROCE Trending?

In terms of Pizu Group Holdings' history of ROCE, it's quite impressive. The company has employed 486% more capital in the last five years, and the returns on that capital have remained stable at 40%. Now considering ROCE is an attractive 40%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

What We Can Learn From Pizu Group Holdings' ROCE

In short, we'd argue Pizu Group Holdings has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 230% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Pizu Group Holdings does have some risks though, and we've spotted 1 warning sign for Pizu Group Holdings that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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