Royale Home Holdings (HKG:1198) Might Have The Makings Of A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Royale Home Holdings' (HKG:1198) returns on capital, so let's have a look.

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. To calculate this metric for Royale Home Holdings, this is the formula:

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

0.011 = HK$45m ÷ (HK$5.5b - HK$1.4b) (Based on the trailing twelve months to June 2021).

Thus, Royale Home Holdings has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 11%.

See our latest analysis for Royale Home Holdings

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

What Does the ROCE Trend For Royale Home Holdings Tell Us?

We're delighted to see that Royale Home Holdings is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.1% on its capital. Not only that, but the company is utilizing 178% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From Royale Home Holdings' ROCE

To the delight of most shareholders, Royale Home Holdings has now broken into profitability. And a remarkable 416% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Royale Home Holdings can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Royale Home Holdings, we've spotted 2 warning signs, and 1 of them is significant.

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.

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.

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