Returns On Capital At Ngai Hing Hong (HKG:1047) Have Stalled

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Ngai Hing Hong (HKG:1047), it didn't seem to tick all of these boxes.

What Is 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. Analysts use this formula to calculate it for Ngai Hing Hong:

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

0.03 = HK$16m ÷ (HK$1.0b - HK$491m) (Based on the trailing twelve months to June 2024).

Therefore, Ngai Hing Hong has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.0%.

View our latest analysis for Ngai Hing Hong

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ngai Hing Hong's ROCE against it's prior returns. If you'd like to look at how Ngai Hing Hong has performed in the past in other metrics, you can view this free graph of Ngai Hing Hong's past earnings, revenue and cash flow.

How Are Returns Trending?

There hasn't been much to report for Ngai Hing Hong's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Ngai Hing Hong in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Another thing to note, Ngai Hing Hong has a high ratio of current liabilities to total assets of 48%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In a nutshell, Ngai Hing Hong has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Ngai Hing Hong has the makings of a multi-bagger.

Ngai Hing Hong does have some risks, we noticed 3 warning signs (and 2 which are potentially serious) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.