Returns On Capital Signal Tricky Times Ahead For Alpha Era International Holdings (HKG:8406)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So while Alpha Era International Holdings (HKG:8406) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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 Alpha Era International Holdings:

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

0.21 = CN¥30m ÷ (CN¥181m - CN¥38m) (Based on the trailing twelve months to March 2021).

So, Alpha Era International Holdings has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Leisure industry average of 5.3%.

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

So How Is Alpha Era International Holdings' ROCE Trending?

When we looked at the ROCE trend at Alpha Era International Holdings, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 42% where it was five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Alpha Era International Holdings has done well to pay down its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

While returns have fallen for Alpha Era International Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 54% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching Alpha Era International Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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