Returns Are Gaining Momentum At EPI (Holdings) (HKG:689)

August 29, 2022
  •  Updated
November 02, 2022
Source: Shutterstock

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at EPI (Holdings) (HKG:689) and its trend of ROCE, we really liked what we saw.

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

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 EPI (Holdings), this is the formula:

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

0.038 = HK$16m ÷ (HK$443m - HK$14m) (Based on the trailing twelve months to December 2021).

So, EPI (Holdings) has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 11%.

Check out our latest analysis for EPI (Holdings)

SEHK:689 Return on Capital Employed August 29th 2022

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 EPI (Holdings), check out these free graphs here.

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 3.8%. Basically the business is earning more per dollar of capital invested and in addition to that, 24% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On EPI (Holdings)'s ROCE

All in all, it's terrific to see that EPI (Holdings) is reaping the rewards from prior investments and is growing its capital base. And since the stock has dived 88% 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.

On a final note, we've found 3 warning signs for EPI (Holdings) that we think you should be aware of.

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.

Valuation is complex, but we're helping make it simple.

Find out whether EPI (Holdings) is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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