Automated Systems Holdings (HKG:771) Has More To Do To Multiply In Value Going Forward

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Automated Systems Holdings (HKG:771), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Automated Systems Holdings is:

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

0.042 = HK$90m ÷ (HK$3.0b - HK$801m) (Based on the trailing twelve months to June 2022).

Therefore, Automated Systems Holdings has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the IT industry average of 6.0%.

View our latest analysis for Automated Systems Holdings

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

How Are Returns Trending?

In terms of Automated Systems Holdings' historical ROCE trend, it doesn't exactly demand attention. The company has employed 55% more capital in the last five years, and the returns on that capital have remained stable at 4.2%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

As we've seen above, Automated Systems Holdings' returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 16% in the last five years. Therefore based on the analysis done in this article, we don't think Automated Systems Holdings has the makings of a multi-bagger.

One final note, you should learn about the 4 warning signs we've spotted with Automated Systems Holdings (including 1 which shouldn't be ignored) .

While Automated Systems Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.