Returns On Capital At Peiport Holdings (HKG:2885) Paint A Concerning Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Peiport Holdings (HKG:2885) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Peiport Holdings, this is the formula:

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

0.069 = HK$25m ÷ (HK$406m - HK$51m) (Based on the trailing twelve months to December 2020).

Thus, Peiport Holdings has an ROCE of 6.9%. In absolute terms, that's a low return but it's around the Electronic industry average of 8.5%.

Check out our latest analysis for Peiport Holdings

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

The Trend Of ROCE

On the surface, the trend of ROCE at Peiport Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.9% from 18% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

In summary, Peiport Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 15% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 2 warning signs with Peiport Holdings and understanding them should be part of your investment process.

While Peiport 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. 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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