Return Trends At Tradelink Electronic Commerce (HKG:536) Aren't Appealing

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Tradelink Electronic Commerce (HKG:536) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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 Tradelink Electronic Commerce:

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

0.20 = HK$76m ÷ (HK$586m - HK$197m) (Based on the trailing twelve months to December 2020).

Therefore, Tradelink Electronic Commerce has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 7.6% generated by the IT industry.

Check out our latest analysis for Tradelink Electronic Commerce

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Tradelink Electronic Commerce, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Tradelink Electronic Commerce'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 Tradelink Electronic Commerce 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 Tradelink Electronic Commerce's ROCE

In summary, Tradelink Electronic Commerce isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly, the stock has only gained 5.6% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to know some of the risks facing Tradelink Electronic Commerce we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Tradelink Electronic Commerce isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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