Some Investors May Be Worried About Theme International Holdings' (HKG:990) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Theme International Holdings (HKG:990) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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

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

0.097 = HK$703m ÷ (HK$18b - HK$10b) (Based on the trailing twelve months to June 2024).

Thus, Theme International Holdings has an ROCE of 9.7%. In absolute terms, that's a low return, but it's much better than the Trade Distributors industry average of 5.9%.

See our latest analysis for Theme International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Theme International Holdings' ROCE against it's prior returns. If you're interested in investigating Theme International Holdings' past further, check out this free graph covering Theme International Holdings' past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Theme International Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.7% from 16% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Theme International Holdings has done well to pay down its current liabilities to 59% of total assets. So we could link some of this to the decrease in ROCE. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From Theme International Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Theme International Holdings. And long term investors must be optimistic going forward because the stock has returned a huge 296% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching Theme International Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Theme International 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.