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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think B & D Strategic Holdings (HKG:1780) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on B & D Strategic Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = HK$2.2m ÷ (HK$268m - HK$72m) (Based on the trailing twelve months to March 2023).
Thus, B & D Strategic Holdings has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.5%.
See our latest analysis for B & D Strategic Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for B & D Strategic Holdings' ROCE against it's prior returns. If you're interested in investigating B & D Strategic Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From B & D Strategic Holdings' ROCE Trend?
On the surface, the trend of ROCE at B & D Strategic Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 37% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a side note, B & D Strategic Holdings has done well to pay down its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
What We Can Learn From B & D Strategic Holdings' ROCE
In summary, we're somewhat concerned by B & D Strategic Holdings' diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 370%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
One final note, you should learn about the 4 warning signs we've spotted with B & D Strategic Holdings (including 1 which is a bit concerning) .
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.