We Like Huaxi Holdings' (HKG:1689) Returns And Here's How They're Trending

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Huaxi Holdings (HKG:1689) we really liked what we saw.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Huaxi Holdings is:

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

0.35 = HK$147m ÷ (HK$576m - HK$162m) (Based on the trailing twelve months to June 2020).

Thus, Huaxi Holdings has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

Check out our latest analysis for Huaxi 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 Huaxi Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Huaxi Holdings Tell Us?

Investors would be pleased with what's happening at Huaxi Holdings. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 35%. Basically the business is earning more per dollar of capital invested and in addition to that, 31% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Huaxi Holdings' ROCE

All in all, it's terrific to see that Huaxi Holdings is reaping the rewards from prior investments and is growing its capital base. And with a respectable 61% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know more about Huaxi Holdings, we've spotted 2 warning signs, and 1 of them can't be ignored.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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