The Return Trends At AKM Industrial (HKG:1639) Look Promising

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at AKM Industrial (HKG:1639) and its trend of ROCE, we really liked what we saw.

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. 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)

0.057 = HK$90m ÷ (HK$2.5b - HK$859m) (Based on the trailing twelve months to December 2020).

Thus, AKM Industrial has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 8.7%.

View our latest analysis for AKM Industrial

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

So How Is AKM Industrial's ROCE Trending?

The fact that AKM Industrial is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 5.7% on its capital. And unsurprisingly, like most companies trying to break into the black, AKM Industrial is utilizing 200% 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 Key Takeaway

Long story short, we're delighted to see that AKM Industrial's reinvestment activities have paid off and the company is now profitable. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 45% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

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.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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