We Like These Underlying Return On Capital Trends At North Asia Strategic Holdings (HKG:8080)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Speaking of which, we noticed some great changes in North Asia Strategic Holdings' (HKG:8080) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for North Asia Strategic Holdings:

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

0.064 = HK$89m ÷ (HK$3.0b - HK$1.6b) (Based on the trailing twelve months to September 2021).

So, North Asia Strategic Holdings has an ROCE of 6.4%. In absolute terms, that's a low return, but it's much better than the Trade Distributors industry average of 5.0%.

View our latest analysis for North Asia Strategic Holdings

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'd like to look at how North Asia Strategic Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For North Asia Strategic Holdings Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.4%. Basically the business is earning more per dollar of capital invested and in addition to that, 65% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 54% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line

All in all, it's terrific to see that North Asia Strategic Holdings is reaping the rewards from prior investments and is growing its capital base. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

North Asia Strategic Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are concerning...

While North Asia Strategic 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. 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.