Here's What To Make Of Royale Home Holdings' (HKG:1198) Decelerating Rates Of Return

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Royale Home Holdings (HKG:1198) and its ROCE trend, we weren't exactly thrilled.

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 Royale Home Holdings:

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

0.023 = HK$93m ÷ (HK$6.1b - HK$2.0b) (Based on the trailing twelve months to June 2022).

Therefore, Royale Home Holdings has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 10%.

See our latest analysis for Royale Home Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Royale Home Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Royale Home Holdings' ROCE Trending?

The returns on capital haven't changed much for Royale Home Holdings in recent years. The company has employed 177% more capital in the last five years, and the returns on that capital have remained stable at 2.3%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

In summary, Royale Home Holdings has simply been reinvesting capital and generating the same low rate of return as before. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 329% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Royale Home Holdings we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Royale Home 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.