The Return Trends At Azeus Systems Holdings (SGX:BBW) Look Promising

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Azeus Systems Holdings' (SGX:BBW) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Azeus Systems Holdings:

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.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Azeus Systems Holdings, check out these free graphs here.

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. The figures show that over the last five years, ROCE has grown 1,190% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

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. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

As discussed above, Azeus Systems Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 2 warning signs with Azeus Systems Holdings and understanding them should be part of your investment process.

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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