What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Come Sure Group (Holdings)'s (HKG:794) returns on capital, so let's have a look.
What is 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. The formula for this calculation on Come Sure Group (Holdings) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = HK$46m ÷ (HK$1.4b - HK$602m) (Based on the trailing twelve months to September 2020).
Therefore, Come Sure Group (Holdings) has an ROCE of 5.5%. On its own, that's a low figure but it's around the 6.7% average generated by the Packaging industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Come Sure Group (Holdings)'s ROCE against it's prior returns. If you're interested in investigating Come Sure Group (Holdings)'s past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Come Sure Group (Holdings)'s ROCE Trend?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 5.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 31% more capital is being employed now too. So we're very much inspired by what we're seeing at Come Sure Group (Holdings) thanks to its ability to profitably reinvest capital.
One more thing to note, Come Sure Group (Holdings) has decreased current liabilities to 42% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Come Sure Group (Holdings) has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.
Our Take On Come Sure Group (Holdings)'s ROCE
All in all, it's terrific to see that Come Sure Group (Holdings) is reaping the rewards from prior investments and is growing its capital base. Since the stock has only returned 17% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
On a separate note, we've found 4 warning signs for Come Sure Group (Holdings) you'll probably want to 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.
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