Investors Will Want BOE Varitronix's (HKG:710) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at BOE Varitronix (HKG:710) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on BOE Varitronix is:

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

0.10 = HK$350m ÷ (HK$5.5b - HK$2.2b) (Based on the trailing twelve months to December 2021).

Thus, BOE Varitronix has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 13% generated by the Semiconductor industry.

See our latest analysis for BOE Varitronix

In the above chart we have measured BOE Varitronix'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 BOE Varitronix here for free.

How Are Returns Trending?

We like the trends that we're seeing from BOE Varitronix. The data shows that returns on capital have increased substantially over the last five years to 10%. Basically the business is earning more per dollar of capital invested and in addition to that, 23% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

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. Effectively this means that suppliers or short-term creditors are now funding 39% of the business, which is more than it was five years ago. 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 Key Takeaway

All in all, it's terrific to see that BOE Varitronix is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 180% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching BOE Varitronix, you might be interested to know about the 2 warning signs that our analysis has discovered.

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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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.