Stock Analysis

Home Control International (HKG:1747) Hasn't Managed To Accelerate Its Returns

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SEHK:1747
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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Home Control International (HKG:1747) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Home Control International is:

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

0.16 = US$6.0m ÷ (US$80m - US$44m) (Based on the trailing twelve months to December 2020).

Thus, Home Control International has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 13% generated by the Consumer Durables industry.

Check out our latest analysis for Home Control International

roce
SEHK:1747 Return on Capital Employed August 4th 2021

Above you can see how the current ROCE for Home Control International compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Home Control International here for free.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Home Control International's returns and its level of capital employed because both metrics have been steady for the past four years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Home Control International to be a multi-bagger going forward.

On a side note, Home Control International's current liabilities are still rather high at 54% of total assets. 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.

What We Can Learn From Home Control International's ROCE

In summary, Home Control International isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 24% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 4 warning signs we've spotted with Home Control International (including 1 which shouldn't be ignored) .

While Home Control International may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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