Alltronics Holdings (HKG:833) Knows How To Allocate Capital Effectively

September 26, 2022
  •  Updated
November 30, 2022
Source: Shutterstock

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, the ROCE of Alltronics Holdings (HKG:833) looks great, so lets see what the trend can tell us.

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. Analysts use this formula to calculate it for Alltronics Holdings:

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

0.20 = HK$122m ÷ (HK$1.3b - HK$721m) (Based on the trailing twelve months to June 2022).

Therefore, Alltronics Holdings has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 10%.

View our latest analysis for Alltronics Holdings

SEHK:833 Return on Capital Employed September 26th 2022

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 want to delve into the historical earnings, revenue and cash flow of Alltronics Holdings, check out these free graphs here.

The Trend Of ROCE

You'd find it hard not to be impressed with the ROCE trend at Alltronics Holdings. The figures show that over the last five years, returns on capital have grown by 145%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 75% less capital than it was five years ago. Alltronics Holdings may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 54% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

Our Take On Alltronics Holdings' ROCE

In a nutshell, we're pleased to see that Alltronics Holdings has been able to generate higher returns from less capital. Although the company may be facing some issues elsewhere since the stock has plunged 89% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Alltronics Holdings does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.

Valuation is complex, but we're helping make it simple.

Find out whether Alltronics Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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