Asia Commercial Holdings (HKG:104) Could Become A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at the ROCE trend of Asia Commercial Holdings (HKG:104) we really liked what we saw.

What Is 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. Analysts use this formula to calculate it for Asia Commercial Holdings:

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

0.23 = HK$118m ÷ (HK$821m - HK$297m) (Based on the trailing twelve months to March 2023).

So, Asia Commercial Holdings has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 9.0% earned by companies in a similar industry.

Check out our latest analysis for Asia Commercial Holdings

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

SWOT Analysis for Asia Commercial Holdings

So How Is Asia Commercial Holdings' ROCE Trending?

Asia Commercial Holdings' ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 217% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 36% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

As discussed above, Asia Commercial Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 24% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found 3 warning signs for Asia Commercial Holdings that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.