Returns At BOE Varitronix (HKG:710) Appear To Be Weighed Down

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at BOE Varitronix (HKG:710) and its ROCE trend, we weren't exactly thrilled.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.053 = HK$150m ÷ (HK$4.2b - HK$1.4b) (Based on the trailing twelve months to June 2021).

Therefore, BOE Varitronix has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 11%.

Check out our latest analysis for BOE Varitronix

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

What Does the ROCE Trend For BOE Varitronix Tell Us?

There hasn't been much to report for BOE Varitronix's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at BOE Varitronix in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Bottom Line On BOE Varitronix's ROCE

In summary, BOE Varitronix isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 250% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 1 warning sign with BOE Varitronix and understanding this should be part of your investment process.

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.