Is There More Growth In Store For Azeus Systems Holdings' (SGX:BBW) Returns On Capital?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. 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 Azeus Systems Holdings (SGX:BBW) and its trend of ROCE, we really liked what we saw.

What is 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 Azeus Systems Holdings is:

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

0.18 = HK$24m ÷ (HK$186m - HK$53m) (Based on the trailing twelve months to September 2020).

Thus, Azeus Systems Holdings has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 11% generated by the IT industry.

See our latest analysis for Azeus Systems Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Azeus Systems Holdings' ROCE against it's prior returns. If you'd like to look at how Azeus Systems 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 Azeus Systems Holdings' ROCE Trending?

Azeus Systems Holdings is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 1,190% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

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. The current liabilities has increased to 29% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On Azeus Systems Holdings' ROCE

To sum it up, Azeus Systems Holdings is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 226% 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.

Azeus Systems Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

While Azeus Systems Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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