Stock Analysis

We're Watching These Trends At Home Control International (HKG:1747)

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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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, while the ROCE is currently high for Home Control International (HKG:1747), we aren't jumping out of our chairs because returns are decreasing.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Home Control International, this is the formula:

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

0.27 = US$9.9m ÷ (US$96m - US$59m) (Based on the trailing twelve months to June 2020).

Therefore, Home Control International has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 10%.

View our latest analysis for Home Control International

roce
SEHK:1747 Return on Capital Employed November 30th 2020

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

So How Is Home Control International's ROCE Trending?

Over the past three years, Home Control International's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. Although current returns are high, we'd need more evidence of underlying growth for it to look like a multi-bagger going forward.

On a side note, Home Control International's current liabilities are still rather high at 61% 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. 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

Although is allocating it's capital efficiently to generate impressive returns, it isn't compounding its base of capital, which is what we'd see from a multi-bagger. Unsurprisingly then, the total return to shareholders over the last year has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Home Control International does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is concerning...

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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