Trends At Alltronics Holdings (HKG:833) Point To A Promising Future

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Ergo, when we looked at the ROCE trends at Alltronics Holdings (HKG:833), we liked what we saw.

What is 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 Alltronics Holdings:

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

0.27 = HK$116m ÷ (HK$1.2b - HK$775m) (Based on the trailing twelve months to June 2020).

So, Alltronics Holdings has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 10%.

See our latest analysis for Alltronics Holdings

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'd like to look at how Alltronics Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Alltronics Holdings Tell Us?

Alltronics Holdings deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 27% and the business has deployed 75% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a separate but related note, it's important to know that Alltronics Holdings has a current liabilities to total assets ratio of 64%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In short, we'd argue Alltronics Holdings has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Yet over the last five years the stock has declined 52%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

One final note, you should learn about the 4 warning signs we've spotted with Alltronics Holdings (including 2 which is are a bit unpleasant) .

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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