Investors Shouldn't Overlook The Favourable Returns On Capital At PC Partner Group (HKG:1263)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at PC Partner Group's (HKG:1263) ROCE trend, we were very happy with what we saw.

Understanding Return On Capital Employed (ROCE)

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 PC Partner Group is:

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

0.32 = HK$932m ÷ (HK$6.2b - HK$3.2b) (Based on the trailing twelve months to December 2022).

Therefore, PC Partner Group has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Tech industry average of 4.4%.

See our latest analysis for PC Partner Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for PC Partner Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of PC Partner Group, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We'd be pretty happy with returns on capital like PC Partner Group. The company has consistently earned 32% for the last five years, and the capital employed within the business has risen 144% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a side note, PC Partner Group has done well to reduce current liabilities to 52% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

In Conclusion...

PC Partner Group has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. In light of this, the stock has only gained 14% over the last five years for shareholders who have owned the stock in this period. So to determine if PC Partner Group is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you want to continue researching PC Partner Group, you might be interested to know about the 3 warning signs that our analysis has discovered.

PC Partner Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.