Shareholders Would Enjoy A Repeat Of Justin Allen Holdings' (HKG:1425) Recent Growth In Returns

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. And in light of that, the trends we're seeing at Justin Allen Holdings' (HKG:1425) look very promising so lets take 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 Justin Allen Holdings, this is the formula:

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

0.32 = HK$136m ÷ (HK$725m - HK$301m) (Based on the trailing twelve months to December 2021).

Therefore, Justin Allen Holdings has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Luxury industry average of 7.1%.

Check out our latest analysis for Justin Allen Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Justin Allen Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Justin Allen Holdings, check out these free graphs here.

So How Is Justin Allen Holdings' ROCE Trending?

The trends we've noticed at Justin Allen Holdings are quite reassuring. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 32%. Basically the business is earning more per dollar of capital invested and in addition to that, 55% more capital is being employed now too. So we're very much inspired by what we're seeing at Justin Allen Holdings thanks to its ability to profitably reinvest capital.

On a side note, Justin Allen Holdings' current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, it's great to see that Justin Allen Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 28% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 2 warning signs for Justin Allen Holdings that we think 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.