Does Raymond Industrial (HKG:229) Have The Makings Of A Multi-Bagger?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Raymond Industrial's (HKG:229) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Raymond Industrial:

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

0.10 = HK$64m ÷ (HK$902m - HK$271m) (Based on the trailing twelve months to September 2020).

So, Raymond Industrial has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 12% generated by the Consumer Durables industry.

View our latest analysis for Raymond Industrial

Historical performance is a great place to start when researching a stock so above you can see the gauge for Raymond Industrial's ROCE against it's prior returns. If you'd like to look at how Raymond Industrial has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Raymond Industrial has not disappointed with their ROCE growth. 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 93% 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

What We Can Learn From Raymond Industrial's ROCE

To bring it all together, Raymond Industrial has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 66% return over the last five years. In light of that, we think it's worth looking further into this stock because if Raymond Industrial can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Raymond Industrial and understanding this should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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