Capital Investment Trends At Topsports International Holdings (HKG:6110) Look Strong

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Topsports International Holdings (HKG:6110) looks attractive right now, so lets see what the trend of returns can tell us.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Topsports International Holdings:

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

0.27 = CN¥3.5b ÷ (CN¥18b - CN¥4.9b) (Based on the trailing twelve months to February 2022).

Thus, Topsports International Holdings has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 11%.

See our latest analysis for Topsports International Holdings

In the above chart we have measured Topsports International Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Topsports International Holdings.

What Can We Tell From Topsports International Holdings' ROCE Trend?

It's hard not to be impressed by Topsports International Holdings' returns on capital. The company has employed 106% more capital in the last five years, and the returns on that capital have remained stable at 27%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 27% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Key Takeaway

In short, we'd argue Topsports International Holdings has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. However, despite the favorable fundamentals, the stock has fallen 32% over the last year, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Topsports International Holdings does have some risks though, and we've spotted 1 warning sign for Topsports International Holdings that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.