The Return Trends At Asian Citrus Holdings (HKG:73) Look Promising

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in Asian Citrus Holdings' (HKG:73) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Asian Citrus Holdings:

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

0.0038 = CN¥815k ÷ (CN¥231m - CN¥16m) (Based on the trailing twelve months to December 2021).

Therefore, Asian Citrus Holdings has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.8%.

See 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. Shareholders would no doubt be pleased with this because the business was loss-making two years ago but is is now generating 0.4% on its capital. 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. This tells us that Asian Citrus Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

Long story short, we're delighted to see that Asian Citrus Holdings' reinvestment activities have paid off and the company is now profitable. Given the stock has declined 37% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Asian Citrus Holdings (of which 1 doesn't sit too well with us!) that you should know about.

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.

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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.