Can Honbridge Holdings (HKG:8137) Continue To Grow Its Returns On Capital?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in Honbridge Holdings' (HKG:8137) returns on capital, so let's have a look.

Understanding 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. To calculate this metric for Honbridge Holdings, this is the formula:

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

0.19 = HK$983m ÷ (HK$5.5b - HK$283m) (Based on the trailing twelve months to September 2020).

Therefore, Honbridge Holdings has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 8.7% it's much better.

See our latest analysis for Honbridge Holdings

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

What The Trend Of ROCE Can Tell Us

It's great to see that Honbridge Holdings has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 19% which is no doubt a relief for some early shareholders. In regards to capital employed, Honbridge Holdings is using 44% 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. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Key Takeaway

In a nutshell, we're pleased to see that Honbridge Holdings has been able to generate higher returns from less capital.

Like most companies, Honbridge Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.

While Honbridge Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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