Returns Are Gaining Momentum At Madison Holdings Group (HKG:8057)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Madison Holdings Group (HKG:8057) so let's look a bit deeper.

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. To calculate this metric for Madison Holdings Group, this is the formula:

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

0.038 = HK$7.4m ÷ (HK$632m - HK$436m) (Based on the trailing twelve months to September 2021).

Thus, Madison Holdings Group has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 10%.

Check out our latest analysis for Madison Holdings Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Madison Holdings Group's ROCE against it's prior returns. If you'd like to look at how Madison Holdings Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Madison Holdings Group's ROCE Trend?

Madison Holdings Group has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 3.8% on its capital. In addition to that, Madison Holdings Group is employing 61% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 69% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Madison Holdings Group's ROCE

Long story short, we're delighted to see that Madison Holdings Group's reinvestment activities have paid off and the company is now profitable. And since the stock has dived 96% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

One final note, you should learn about the 5 warning signs we've spotted with Madison Holdings Group (including 2 which can't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.