Best Linking Group Holdings (HKG:8617) Might Become A Compounding Machine

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Best Linking Group Holdings' (HKG:8617) ROCE trend, we were very happy with 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. Analysts use this formula to calculate it for Best Linking Group Holdings:

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

0.28 = HK$39m ÷ (HK$173m - HK$34m) (Based on the trailing twelve months to June 2023).

Thus, Best Linking Group Holdings has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 7.1% earned by companies in a similar industry.

View 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're interested in investigating Best Linking Group Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Best Linking Group Holdings deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 28% and the business has deployed 190% more capital into its operations. Now considering ROCE is an attractive 28%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

In Conclusion...

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has done incredibly well with a 291% return over the last three years, so long term investors are no doubt ecstatic with that result. 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 2 warning signs with Best Linking Group Holdings and understanding these should be part of your investment process.

Best Linking Group Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.