Capital Investment Trends At Hong Kong Johnson Holdings (HKG:1955) Look Strong

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So, when we ran our eye over Hong Kong Johnson Holdings' (HKG:1955) trend of ROCE, we really liked what we saw.

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 Hong Kong Johnson Holdings, this is the formula:

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

0.33 = HK$187m ÷ (HK$1.4b - HK$800m) (Based on the trailing twelve months to September 2021).

Thus, Hong Kong Johnson Holdings has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Commercial Services industry average of 9.1%.

View our latest analysis for Hong Kong Johnson Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hong Kong Johnson Holdings' ROCE against it's prior returns. If you'd like to look at how Hong Kong Johnson 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

Hong Kong Johnson Holdings deserves to be commended in regards to it's returns. Over the past four years, ROCE has remained relatively flat at around 33% and the business has deployed 316% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Hong Kong Johnson Holdings can keep this up, we'd be very optimistic about its future.

On a separate but related note, it's important to know that Hong Kong Johnson Holdings has a current liabilities to total assets ratio of 59%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, we're delighted to see that Hong Kong Johnson Holdings has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 53% return if they held over the last year. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you'd like to know about the risks facing Hong Kong Johnson Holdings, we've discovered 3 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.