What Do The Returns On Capital At AMS Public Transport Holdings (HKG:77) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think AMS Public Transport Holdings (HKG:77) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on AMS Public Transport Holdings is:

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

0.064 = HK$14m ÷ (HK$300m - HK$84m) (Based on the trailing twelve months to March 2020).

Therefore, AMS Public Transport Holdings has an ROCE of 6.4%. On its own, that's a low figure but it's around the 5.5% average generated by the Transportation industry.

See our latest analysis for AMS Public Transport Holdings

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

So How Is AMS Public Transport Holdings' ROCE Trending?

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 42% in that same period. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 6.4%, it's hard to get excited about these developments.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 28% of total assets, this reported ROCE would probably be less than6.4% because total capital employed would be higher.The 6.4% ROCE could be even lower if current liabilities weren't 28% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Key Takeaway

In summary, AMS Public Transport Holdings isn't reinvesting funds back into the business and returns aren't growing. And in the last five years, the stock has given away 36% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with AMS Public Transport Holdings (including 1 which is is a bit unpleasant) .

While AMS Public Transport Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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