If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of International Housewares Retail (HKG:1373) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for International Housewares Retail:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = HK$319m ÷ (HK$1.7b - HK$648m) (Based on the trailing twelve months to October 2020).
Therefore, International Housewares Retail has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 9.7% earned by companies in a similar industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for International Housewares Retail's ROCE against it's prior returns. If you're interested in investigating International Housewares Retail's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From International Housewares Retail's ROCE Trend?
The trends we've noticed at International Housewares Retail are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 31%. Basically the business is earning more per dollar of capital invested and in addition to that, 46% more capital is being employed now too. So we're very much inspired by what we're seeing at International Housewares Retail thanks to its ability to profitably reinvest capital.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 39% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
The Key Takeaway
In summary, it's great to see that International Housewares Retail can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 249% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if International Housewares Retail can keep these trends up, it could have a bright future ahead.
If you'd like to know about the risks facing International Housewares Retail, we've discovered 1 warning sign that 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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