E-Commodities Holdings (HKG:1733) could become a multi-bagger

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There are a few key trends to look out for if we want to identify the next multi-bagger. First, we’ll want to see proof to return to on capital employed (ROCE) which is increasing, and on the other hand, a based capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. So when we looked at the ROCE trend of Electronic product holdings (HKG:1733) we really liked what we saw.

What is return on capital employed (ROCE)?

For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. To calculate this metric for E-Commodities Holdings, here is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.26 = HK$1.3 billion ÷ (HK$10 billion – HK$5.3 billion) (Based on the last twelve months to June 2021).

Therefore, E-Commodities Holdings has a ROCE of 26%. In absolute terms, this is an excellent return and is even better than the 13% average for the metals and mining industry.

Check out our latest analysis for E-Commodities Holdings

SEHK:1733 Return on capital employed January 26, 2022

Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to dive deep into E-Commodities Holdings’ earnings, revenue, and cash flow history, check out these free graphics here.

What can we say about the ROCE trend of E-Commodities Holdings?

Investors would be delighted with what is happening at E-Commodities Holdings. Data shows that capital returns have increased significantly over the past five years to 26%. The business is actually making more money per dollar of capital employed, and it’s worth noting that the amount of capital has also increased by 353%. Increasing returns on an increasing amount of capital are common among multi-baggers and that’s why we’re impressed.

One last thing to note, E-Commodities Holdings has reduced current liabilities to 51% of total assets during this period, which effectively reduces the amount of financing from suppliers or short-term creditors. Shareholders would therefore be pleased if the growth in returns came primarily from underlying business performance. However, current liabilities are still at a fairly high level, so just be aware that this may come with some risk.

The essentials on the ROCE of E-Commodities Holdings

A business that increases its returns on capital and can constantly reinvest in itself is a highly sought after trait, and that is what E-Commodities Holdings possesses. And with a respectable 79% attributed to those who held the shares over the past five years, you could say these developments are starting to get the attention they deserve. That being said, we still think the promising fundamentals mean the company merits further due diligence.

Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 3 warning signs for E-Commodities Holdings (2 of which are concerning!) that you should know about.

If you want to see other businesses earning high returns, check out our free list of companies earning high returns with strong balance sheets here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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