Will the Promising Trends At Casablanca Group (HKG:2223) Continue?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Casablanca Group's (HKG:2223) returns on capital, so let's have a look.

What is 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. To calculate this metric for Casablanca Group, this is the formula:

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

0.023 = HK$9.2m ÷ (HK$475m - HK$73m) (Based on the trailing twelve months to June 2020).

Therefore, Casablanca Group has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 10%.

See our latest analysis for Casablanca Group

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 Casablanca Group's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Casablanca Group's ROCE Trending?

While the ROCE isn't as high as some other companies out there, it's great to see it's on the up. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 69% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

In Conclusion...

To sum it up, Casablanca Group is collecting higher returns from the same amount of capital, and that's impressive. Although the company may be facing some issues elsewhere since the stock has plunged 75% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Like most companies, Casablanca Group does come with some risks, and we've found 2 warning signs that you should be aware of.

While Casablanca Group 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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