Returns At Asia Cassava Resources Holdings (HKG:841) Are On The Way Up

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Asia Cassava Resources Holdings' (HKG:841) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Asia Cassava Resources Holdings is:

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

0.048 = HK$53m ÷ (HK$2.0b - HK$890m) (Based on the trailing twelve months to September 2021).

Therefore, Asia Cassava Resources Holdings has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Food industry average of 9.8%.

See our latest analysis for Asia Cassava Resources Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Asia Cassava Resources Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Asia Cassava Resources Holdings, check out these free graphs here.

What Can We Tell From Asia Cassava Resources Holdings' ROCE Trend?

The fact that Asia Cassava Resources 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 five years ago but is is now generating 4.8% on its capital. In addition to that, Asia Cassava Resources Holdings is employing 41% more capital than previously which is expected of a company that's trying to break into profitability. 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.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 44% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Asia Cassava Resources Holdings' ROCE

Overall, Asia Cassava Resources 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. Astute investors may have an opportunity here because the stock has declined 51% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about Asia Cassava Resources Holdings, we've spotted 4 warning signs, and 2 of them can't be ignored.

While Asia Cassava Resources 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.