Did you know there are some financial metrics that can provide clues of a potential 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. 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 PC Partner Group (HKG:1263) and its trend of ROCE, we really liked what we saw.
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. To calculate this metric for PC Partner Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.19 = HK$196m ÷ (HK$3.7b – HK$2.7b) (Based on the trailing twelve months to June 2020).
Therefore, PC Partner Group has an ROCE of 19%. In absolute terms, that’s a satisfactory return, but compared to the Tech industry average of 6.5% it’s much better.
View our latest analysis for PC Partner Group
In the above chart we have measured PC Partner Group’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering PC Partner Group here for free.
What Can We Tell From PC Partner Group’s ROCE Trend?
PC Partner Group is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 34%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 72% of its operations, which isn’t ideal. Given it’s pretty high ratio, we’d remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
In summary, it’s great to see that PC Partner Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 554% 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 PC Partner Group can keep these trends up, it could have a bright future ahead.
If you want to continue researching PC Partner Group, you might be interested to know about the 2 warning signs that our analysis has discovered.
While PC Partner Group 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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