Will Automated Systems Holdings' (HKG:771) Growth In ROCE Persist?

What trends should we look for it we want to identify stocks that can 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Automated Systems Holdings (HKG:771) and its trend of ROCE, we really liked what we saw.

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

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

0.071 = HK$165m ÷ (HK$3.3b - HK$940m) (Based on the trailing twelve months to June 2020).

Thus, Automated Systems Holdings has an ROCE of 7.1%. On its own, that's a low figure but it's around the 8.6% average generated by the IT industry.

See 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'd like to look at how Automated Systems Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Automated Systems Holdings' ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.1%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 228%. So we're very much inspired by what we're seeing at Automated Systems Holdings thanks to its ability to profitably reinvest capital.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Automated Systems Holdings has. Since the stock has returned a staggering 116% 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'd like to know about the risks facing Automated Systems Holdings, we've discovered 1 warning sign that you should be aware of.

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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