What We Make Of Holy Stone EnterpriseLtd's (TPE:3026) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 on that note, Holy Stone EnterpriseLtd (TPE:3026) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Holy Stone EnterpriseLtd, this is the formula:

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

0.11 = NT$1.1b ÷ (NT$14b - NT$3.9b) (Based on the trailing twelve months to September 2020).

Thus, Holy Stone EnterpriseLtd has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

View our latest analysis for Holy Stone EnterpriseLtd

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

The Trend Of ROCE

Holy Stone EnterpriseLtd is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 53% over the last five years. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line

As discussed above, Holy Stone EnterpriseLtd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 262% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Holy Stone EnterpriseLtd can keep these trends up, it could have a bright future ahead.

If you want to continue researching Holy Stone EnterpriseLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Holy Stone EnterpriseLtd 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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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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