Capital Investments At Smoore International Holdings (HKG:6969) Point To A Promising Future

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ergo, when we looked at the ROCE trends at Smoore International Holdings (HKG:6969), we liked what we saw.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Smoore International Holdings, this is the formula:

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

0.33 = CN¥5.9b ÷ (CN¥20b - CN¥2.4b) (Based on the trailing twelve months to June 2021).

So, Smoore International Holdings has an ROCE of 33%. That's a fantastic return and not only that, it outpaces the average of 18% earned by companies in a similar industry.

View our latest analysis for Smoore International Holdings

Above you can see how the current ROCE for Smoore International Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Smoore International Holdings Tell Us?

In terms of Smoore International Holdings' history of ROCE, it's quite impressive. The company has consistently earned 33% for the last five years, and the capital employed within the business has risen 7,738% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Smoore International Holdings can keep this up, we'd be very optimistic about its future.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 12% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Smoore International Holdings' ROCE

In short, we'd argue Smoore International Holdings has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. However, over the last year, the stock hasn't provided much growth to shareholders in the way of total returns. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Smoore International Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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.

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