Starlite Holdings (HKG:403) Shareholders Will Want The ROCE Trajectory To Continue

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 Starlite Holdings (HKG:403) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Starlite Holdings is:

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

0.026 = HK$17m ÷ (HK$953m - HK$299m) (Based on the trailing twelve months to March 2023).

Thus, Starlite Holdings has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 6.6%.

Check out our latest analysis for Starlite Holdings

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

What Does the ROCE Trend For Starlite Holdings Tell Us?

We're delighted to see that Starlite Holdings is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 2.6% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

One more thing to note, Starlite Holdings has decreased current liabilities to 31% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Starlite Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Starlite Holdings' ROCE

As discussed above, Starlite Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Given the stock has declined 23% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, Starlite Holdings does come with some risks, and we've found 4 warning signs that you should be aware of.

While Starlite 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.