Best Linking Group Holdings (HKG:8617) Knows How To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Ergo, when we looked at the ROCE trends at Best Linking Group Holdings (HKG:8617), we liked what we saw.

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

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. The formula for this calculation on Best Linking Group Holdings is:

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

0.30 = HK$33m ÷ (HK$121m - HK$9.6m) (Based on the trailing twelve months to September 2021).

Therefore, Best Linking Group Holdings has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Machinery industry average of 10%.

Check out our latest analysis for Best Linking Group Holdings

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

The Trend Of ROCE

We'd be pretty happy with returns on capital like Best Linking Group Holdings. The company has employed 134% more capital in the last three years, and the returns on that capital have remained stable at 30%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Best Linking Group Holdings can keep this up, we'd be very optimistic about its future.

In Conclusion...

In short, we'd argue Best Linking Group Holdings has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And since the stock has risen strongly over the last year, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 3 warning signs with Best Linking Group Holdings and understanding them should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.