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. 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 when we looked at PC Partner Group (HKG:1263) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on PC Partner Group is:
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).
So, PC Partner Group has an ROCE of 19%. On its own, that’s a standard return, however it’s much better than the 7.0% generated by the Tech industry.
View our latest analysis for PC Partner Group
Above you can see how the current ROCE for PC Partner Group compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for PC Partner Group.
So How Is PC Partner Group’s ROCE Trending?
Investors would be pleased with what’s happening at PC Partner Group. Over the last five years, returns on capital employed have risen substantially to 19%. The amount of capital employed has increased too, by 34%. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 72% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that’s pretty high.
What We Can Learn From PC Partner Group’s ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that’s what PC Partner Group has. And with the stock having performed exceptionally well over the last five years, these trends are being accounted for by investors. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
One more thing to note, we’ve identified 3 warning signs with PC Partner Group 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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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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