Returns At BOE Varitronix (HKG:710) Are On The Way Up

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So on that note, BOE Varitronix (HKG:710) looks quite promising in regards to its trends of return on capital.

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 BOE Varitronix, this is the formula:

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

0.074 = HK$375m ÷ (HK$11b - HK$5.8b) (Based on the trailing twelve months to June 2024).

Thus, BOE Varitronix has an ROCE of 7.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.2%.

Check out our latest analysis for BOE Varitronix

In the above chart we have measured BOE Varitronix's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for BOE Varitronix .

What Does the ROCE Trend For BOE Varitronix Tell Us?

BOE Varitronix has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 7.4% which is a sight for sore eyes. In addition to that, BOE Varitronix is employing 81% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 53% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Key Takeaway

Long story short, we're delighted to see that BOE Varitronix's reinvestment activities have paid off and the company is now profitable. And a remarkable 230% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While BOE Varitronix looks impressive, no company is worth an infinite price. The intrinsic value infographic for 710 helps visualize whether it 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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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.