Luk Fook Holdings (International) (HKG:590) Has Some Way To Go To Become A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. That's why when we briefly looked at Luk Fook Holdings (International)'s (HKG:590) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Luk Fook Holdings (International):

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

0.13 = HK$1.6b ÷ (HK$16b - HK$3.9b) (Based on the trailing twelve months to March 2022).

So, Luk Fook Holdings (International) has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 10% generated by the Specialty Retail industry.

Check out our latest analysis for Luk Fook Holdings (International)

In the above chart we have measured Luk Fook Holdings (International)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Luk Fook Holdings (International) here for free.

The Trend Of ROCE

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 35% more capital into its operations. 13% is a pretty standard return, and it provides some comfort knowing that Luk Fook Holdings (International) has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From Luk Fook Holdings (International)'s ROCE

The main thing to remember is that Luk Fook Holdings (International) has proven its ability to continually reinvest at respectable rates of return. And given the stock has only risen 0.2% over the last five years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

If you want to continue researching Luk Fook Holdings (International), you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.