If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. Typically, we will want to notice a growth trend to return to on capital employed (ROCE) and at the same time, a based capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. So when we ran our eyes Topsports International Holdings’ (HKG:6110) ROCE trend, we really liked what we saw.
Return on capital employed (ROCE): what is it?
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. The formula for this calculation on Topsports International Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.33 = CN¥4.2b ÷ (CN¥18b – CN¥5.1b) (Based on the last twelve months to August 2021).
Thereby, Topsports International Holdings has a ROCE of 33%. In absolute terms, that’s an excellent return and even better than the specialty retail industry average of 13%.
Check out our latest analysis for Topsports International Holdings
In the chart above, we measured Topsports International Holdings past ROCE against its past performance, but the future is arguably more important. If you wish, you can view analyst forecasts covering Topsports International Holdings here for free.
What is the return trend?
Topsports International Holdings deserves credit for its returns. Over the past four years, ROCE has remained relatively stable at around 33% and the company has deployed 115% more capital into its operations. Such returns are the envy of most companies and given that they have repeatedly reinvested at these rates, even better. If Topsports International Holdings can continue like this, we would be very optimistic about its future.
One last thing to note, even though ROCE has remained relatively stable over the past four years, the reduction in current liabilities to 28% of total assets is good to see from a business owner’s perspective. This can eliminate some of the risks inherent in operations, as the business has fewer outstanding obligations to suppliers and/or short-term creditors than before.
Topsports International Holdings ROCE Basics
In summary, we are pleased to see that Topsports International Holdings has compounded returns by reinvesting at consistently high rates of return, as these are common characteristics of a multi-bagger. Still, over the past year, the stock is down 28%, so the drop could provide an opening. For this reason, savvy investors may want to dig into this company in case it is a top investment.
On a separate note, we found 1 warning sign for Topsports International Holdings you will probably want to know more.
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.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.