Be Wary Of Boltek Holdings (HKG:8601) And Its Returns On Capital

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Boltek Holdings (HKG:8601), it didn't seem to tick all of these boxes.

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

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

0.088 = HK$18m ÷ (HK$217m - HK$11m) (Based on the trailing twelve months to September 2023).

So, Boltek Holdings has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Construction industry average of 8.3%.

Check out our latest analysis for Boltek Holdings

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

What Does the ROCE Trend For Boltek Holdings Tell Us?

When we looked at the ROCE trend at Boltek Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 32%, but since then they've fallen to 8.8%. However it looks like Boltek Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Boltek Holdings has decreased its current liabilities to 5.3% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Boltek Holdings' ROCE

To conclude, we've found that Boltek Holdings is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 22% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Boltek Holdings does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Boltek 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.