Investors Will Want East Buy Holding's (HKG:1797) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. 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, we've noticed some promising trends at East Buy Holding (HKG:1797) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for East Buy Holding, this is the formula:

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

0.058 = CN¥294m ÷ (CN¥6.5b - CN¥1.5b) (Based on the trailing twelve months to May 2024).

Thus, East Buy Holding has an ROCE of 5.8%. On its own, that's a low figure but it's around the 7.3% average generated by the Consumer Retailing industry.

Check out our latest analysis for East Buy Holding

In the above chart we have measured East Buy Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering East Buy Holding for free.

The Trend Of ROCE

We're delighted to see that East Buy Holding is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 5.8% on its capital. Not only that, but the company is utilizing 94% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line On East Buy Holding's ROCE

Long story short, we're delighted to see that East Buy Holding's reinvestment activities have paid off and the company is now profitable. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 2.9% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

East Buy Holding does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While East Buy Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.