Orient Victory Smart urban Services Holding (HKG:265) Shareholders Will Want The ROCE Trajectory To Continue

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Orient Victory Smart urban Services Holding (HKG:265) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Orient Victory Smart urban Services Holding:

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

0.051 = HK$34m ÷ (HK$812m - HK$145m) (Based on the trailing twelve months to December 2022).

Therefore, Orient Victory Smart urban Services Holding has an ROCE of 5.1%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 3.1%.

View our latest analysis for Orient Victory Smart urban Services Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Orient Victory Smart urban Services Holding's ROCE against it's prior returns. If you're interested in investigating Orient Victory Smart urban Services Holding's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

It's great to see that Orient Victory Smart urban Services Holding has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 5.1% which is no doubt a relief for some early shareholders. In regards to capital employed, Orient Victory Smart urban Services Holding is using 23% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 18% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

In the end, Orient Victory Smart urban Services Holding has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has dived 85% 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 more thing, we've spotted 2 warning signs facing Orient Victory Smart urban Services Holding that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.