Returns on Capital Paint A Bright Future For Rich Honour International Designs (TWSE:6754)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Rich Honour International Designs' (TWSE:6754) look very promising so lets take a look.

Return On Capital Employed (ROCE): What Is It?

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 Rich Honour International Designs is:

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

0.23 = NT$557m ÷ (NT$4.8b - NT$2.3b) (Based on the trailing twelve months to June 2024).

Thus, Rich Honour International Designs has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 12%.

See our latest analysis for Rich Honour International Designs

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rich Honour International Designs' ROCE against it's prior returns. If you're interested in investigating Rich Honour International Designs' past further, check out this free graph covering Rich Honour International Designs' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Rich Honour International Designs. The data shows that returns on capital have increased substantially over the last five years to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 53% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Rich Honour International Designs has decreased current liabilities to 49% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Rich Honour International Designs has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

Our Take On Rich Honour International Designs' ROCE

All in all, it's terrific to see that Rich Honour International Designs is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 99% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Rich Honour International Designs can keep these trends up, it could have a bright future ahead.

Rich Honour International Designs does have some risks though, and we've spotted 1 warning sign for Rich Honour International Designs that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.