Will Infinity Development Holdings (HKG:640) Repeat Its Return Growth Of The Past?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Infinity Development Holdings (HKG:640) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Infinity Development Holdings:

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

0.20 = HK$80m ÷ (HK$525m - HK$127m) (Based on the trailing twelve months to March 2020).

So, Infinity Development Holdings has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 11%.

Check out our latest analysis for Infinity Development Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Infinity Development Holdings' ROCE against it's prior returns. If you're interested in investigating Infinity Development Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Infinity Development Holdings is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 67% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

To sum it up, Infinity Development Holdings is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 41% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 2 warning signs with Infinity Development Holdings and understanding them should be part of your investment process.

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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This article by Simply Wall St is general in nature. 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.
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