Is AKM Industrial (HKG:1639) A Future Multi-bagger?

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in AKM Industrial's (HKG:1639) returns on capital, so let's have a look.

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. To calculate this metric for AKM Industrial, this is the formula:

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

0.058 = HK$77m ÷ (HK$2.0b - HK$641m) (Based on the trailing twelve months to June 2020).

Thus, AKM Industrial has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.7%.

View our latest analysis for AKM Industrial

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

What Does the ROCE Trend For AKM Industrial Tell Us?

We're delighted to see that AKM Industrial is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 5.8% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, AKM Industrial is utilizing 136% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line

In summary, it's great to see that AKM Industrial has managed to break into profitability and is continuing to reinvest in its business. And with a respectable 84% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While AKM Industrial looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 1639 is currently trading for a fair price.

While AKM Industrial 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. 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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