We Think Justin Allen Holdings (HKG:1425) Might Have The DNA Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. So when we looked at the ROCE trend of Justin Allen Holdings (HKG:1425) we really liked what we saw.

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. 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$139m ÷ (HK$578m - HK$146m) (Based on the trailing twelve months to December 2020).

Therefore, Justin Allen Holdings has an ROCE of 32%. That's a fantastic return and not only that, it outpaces the average of 7.4% earned by companies in a similar industry.

Check out our latest analysis for Justin Allen 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 Justin Allen Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Justin Allen Holdings' ROCE Trending?

We like the trends that we're seeing from Justin Allen Holdings. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 32%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 75%. 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 related note, the company's ratio of current liabilities to total assets has decreased to 25%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Justin Allen Holdings' ROCE

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. And with a respectable 47% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Justin Allen Holdings can keep these trends up, it could have a bright future ahead.

Justin Allen Holdings does have some risks though, and we've spotted 2 warning signs for Justin Allen Holdings that you might be interested in.

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. 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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