Elate Holdings (HKG:76) Is Doing The Right Things To Multiply Its Share Price

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Elate Holdings (HKG:76) so let's look a bit deeper.

Understanding 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. The formula for this calculation on Elate Holdings is:

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

0.016 = US$6.4m ÷ (US$408m - US$19m) (Based on the trailing twelve months to December 2021).

Therefore, Elate Holdings has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 6.1%.

View our latest analysis for Elate Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Elate Holdings' ROCE against it's prior returns. If you'd like to look at how Elate Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Elate Holdings' ROCE Trend?

Elate Holdings has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 1.6% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a related note, the company's ratio of current liabilities to total assets has decreased to 4.7%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Elate Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

As discussed above, Elate Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Given the stock has declined 47% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know about the risks facing Elate Holdings, we've discovered 2 warning signs that you should be aware of.

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.