We Like These Underlying Return On Capital Trends At Tristate Holdings (HKG:458)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in Tristate Holdings' (HKG:458) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 Tristate Holdings, this is the formula:

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

0.12 = HK$206m ÷ (HK$2.9b - HK$1.1b) (Based on the trailing twelve months to June 2022).

Thus, Tristate Holdings has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Luxury industry.

See our latest analysis for Tristate Holdings

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

What Can We Tell From Tristate Holdings' ROCE Trend?

We're delighted to see that Tristate Holdings is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 12% which is a sight for sore eyes. Not only that, but the company is utilizing 34% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 39% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On Tristate Holdings' ROCE

To the delight of most shareholders, Tristate Holdings has now broken into profitability. Given the stock has declined 51% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 3 warning signs with Tristate Holdings (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

While Tristate Holdings 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.