If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Chervon Holdings (HKG:2285) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for Chervon Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$170m ÷ (US$1.9b - US$825m) (Based on the trailing twelve months to June 2022).
So, Chervon Holdings has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Consumer Durables industry.
Check out our latest analysis for Chervon Holdings
Above you can see how the current ROCE for Chervon Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Chervon Holdings here for free.
The Trend Of ROCE
Chervon Holdings is displaying some positive trends. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 16%. The amount of capital employed has increased too, by 349%. So we're very much inspired by what we're seeing at Chervon Holdings thanks to its ability to profitably reinvest capital.
On a related note, the company's ratio of current liabilities to total assets has decreased to 44%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Chervon Holdings 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.
The Bottom Line On Chervon Holdings' ROCE
In summary, it's great to see that Chervon Holdings 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. And since the stock has fallen 24% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
If you want to continue researching Chervon Holdings, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Chervon Holdings 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. 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.