Elate Holdings (HKG:76) Is Looking To Continue Growing Its Returns On Capital
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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Elate Holdings (HKG:76) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Elate Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = US$6.5m ÷ (US$409m - US$21m) (Based on the trailing twelve months to June 2021).
Thus, Elate Holdings has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.7%.
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 Does the ROCE Trend For Elate Holdings Tell Us?
Shareholders will be relieved that Elate Holdings has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 1.7% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. 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.
In Conclusion...
In summary, we're delighted to see that Elate Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has dived 71% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
One more thing to note, we've identified 2 warning signs with Elate Holdings and understanding them should be part of your investment process.
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.
Valuation is complex, but we're here to simplify it.
Discover if Elate Holdings might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
Access Free AnalysisThis 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.
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About SEHK:76
Elate Holdings
An investment holding company, provides contract manufacturing services in the United Kingdom, Hong Kong, Germany, Spain, China, Singapore, Madagascar, and internationally.
Flawless balance sheet and slightly overvalued.
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