Has Alpha Era International Holdings (HKG:8406) Got What It Takes To Become A Multi-Bagger?

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. Looking at Alpha Era International Holdings (HKG:8406), it does have a high ROCE right now, but lets see how returns are trending.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Alpha Era International Holdings is:

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

0.26 = CN¥37m ÷ (CN¥194m - CN¥51m) (Based on the trailing twelve months to September 2020).

So, Alpha Era International Holdings has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Leisure industry average of 7.8%.

View our latest analysis for Alpha Era International 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 Alpha Era International Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Alpha Era International Holdings' ROCE Trending?

On the surface, the trend of ROCE at Alpha Era International Holdings doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 34%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Alpha Era International Holdings has decreased its current liabilities to 26% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Alpha Era International Holdings. These growth trends haven't led to growth returns though, since the stock has fallen 36% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Alpha Era International Holdings does have some risks though, and we've spotted 3 warning signs for Alpha Era International Holdings that you might be interested in.

Alpha Era International Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. 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.
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