What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Theme International Holdings (HKG:990) 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. The formula for this calculation on Theme International Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = HK$1.1b ÷ (HK$15b - HK$8.6b) (Based on the trailing twelve months to June 2023).
Thus, Theme International Holdings has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 5.9% generated by the Trade Distributors industry.
View our latest analysis for Theme International Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Theme International Holdings' ROCE against it's prior returns. If you're interested in investigating Theme International Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Theme International Holdings' ROCE Trend?
Investors would be pleased with what's happening at Theme International Holdings. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. 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 888%. So we're very much inspired by what we're seeing at Theme International Holdings thanks to its ability to profitably reinvest capital.
On a separate but related note, it's important to know that Theme International Holdings has a current liabilities to total assets ratio of 56%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
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 Theme International Holdings has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Theme International Holdings can keep these trends up, it could have a bright future ahead.
Theme International Holdings does have some risks though, and we've spotted 1 warning sign for Theme International Holdings that you might be interested in.
While Theme International Holdings 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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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.