Speedy Global Holdings (HKG:540) Is Very Good At Capital Allocation

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Speedy Global Holdings' (HKG:540) returns on capital, so let's have a look.

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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. To calculate this metric for Speedy Global Holdings, this is the formula:

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

0.34 = HK$30m ÷ (HK$283m - HK$196m) (Based on the trailing twelve months to December 2024).

So, Speedy Global Holdings has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Luxury industry average of 13%.

See our latest analysis for Speedy Global Holdings

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

The Trend Of ROCE

Speedy Global Holdings has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 155%. The company is now earning HK$0.3 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 73% less capital than it was five years ago. Speedy Global Holdings may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

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 69% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Speedy Global Holdings' ROCE

In the end, Speedy Global Holdings has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 29% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One final note, you should learn about the 2 warning signs we've spotted with Speedy Global Holdings (including 1 which doesn't sit too well with us) .

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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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.