Returns At Asian Citrus Holdings (HKG:73) Are On The Way Up

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Asian Citrus Holdings' (HKG:73) returns on capital, so let's have a look.

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. To calculate this metric for Asian Citrus Holdings, this is the formula:

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

0.0053 = CN¥1.1m ÷ (CN¥231m - CN¥16m) (Based on the trailing twelve months to December 2021).

Thus, Asian Citrus Holdings has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.6%.

View our latest analysis for Asian Citrus 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'd like to look at how Asian Citrus Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Asian Citrus Holdings' ROCE Trending?

The fact that Asian Citrus Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses two years ago, but now it's earning 0.5% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Asian Citrus Holdings is utilizing 106% more capital than it was two years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 6.8%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

Overall, Asian Citrus Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And since the stock has fallen 67% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Like most companies, Asian Citrus Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

While Asian Citrus Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.