What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 when we looked at Great Harvest Maeta Holdings (HKG:3683) and its trend of ROCE, we really liked what we saw.
Understanding 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. The formula for this calculation on Great Harvest Maeta Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = US$3.1m ÷ (US$146m - US$78m) (Based on the trailing twelve months to September 2021).
So, Great Harvest Maeta Holdings has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 10.0%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Great Harvest Maeta Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Great Harvest Maeta Holdings, check out these free graphs here.
So How Is Great Harvest Maeta Holdings' ROCE Trending?
It's great to see that Great Harvest Maeta Holdings has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 4.5% on their capital employed. In regards to capital employed, Great Harvest Maeta Holdings is using 30% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Great Harvest Maeta Holdings could be selling under-performing assets since the ROCE is improving.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 53% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
The Bottom Line
In summary, it's great to see that Great Harvest Maeta Holdings has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has only returned 4.9% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
If you want to know some of the risks facing Great Harvest Maeta Holdings we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.