Returns On Capital Are Showing Encouraging Signs At EPI (Holdings) (HKG:689)

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in EPI (Holdings)'s (HKG:689) returns on capital, so let's have a look.

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 EPI (Holdings), this is the formula:

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

0.021 = HK$9.1m ÷ (HK$443m - HK$14m) (Based on the trailing twelve months to December 2021).

Thus, EPI (Holdings) has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 9.1%.

Check out our latest analysis for EPI (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're interested in investigating EPI (Holdings)'s past further, check out this free graph of past earnings, revenue and cash flow.

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 2.1%. The amount of capital employed has increased too, by 24%. So we're very much inspired by what we're seeing at EPI (Holdings) thanks to its ability to profitably reinvest capital.

The Bottom Line

All in all, it's terrific to see that EPI (Holdings) is reaping the rewards from prior investments and is growing its capital base. However the stock is down a substantial 94% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

Like most companies, EPI (Holdings) does come with some risks, and we've found 3 warning signs that you should be aware of.

While EPI (Holdings) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.