The Return Trends At Tungtex (Holdings) (HKG:518) Look Promising

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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 Tungtex (Holdings)'s (HKG:518) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Tungtex (Holdings):

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

0.029 = HK$12m ÷ (HK$593m - HK$199m) (Based on the trailing twelve months to September 2022).

Therefore, Tungtex (Holdings) has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 11%.

View our latest analysis for Tungtex (Holdings)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tungtex (Holdings)'s ROCE against it's prior returns. If you're interested in investigating Tungtex (Holdings)'s past further, check out this free graph of past earnings, revenue and cash flow.

SWOT Analysis for Tungtex (Holdings)

So How Is Tungtex (Holdings)'s ROCE Trending?

Tungtex (Holdings) has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 2.9% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Our Take On Tungtex (Holdings)'s ROCE

To sum it up, Tungtex (Holdings) is collecting higher returns from the same amount of capital, and that's impressive. Astute investors may have an opportunity here because the stock has declined 44% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 2 warning signs for Tungtex (Holdings) you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.