If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Luk Fook Holdings (International) (HKG:590), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Luk Fook Holdings (International) is:

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

0.12 = HK$1.5b ÷ (HK$15b - HK$2.5b) (Based on the trailing twelve months to March 2023).

So, Luk Fook Holdings (International) has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 9.0% it's much better.

Check out our latest analysis for Luk Fook Holdings (International)

Above you can see how the current ROCE for Luk Fook Holdings (International) 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 Luk Fook Holdings (International) here for free.

What Can We Tell From Luk Fook Holdings (International)'s ROCE Trend?

When we looked at the ROCE trend at Luk Fook Holdings (International), we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last five years. However it looks like Luk Fook Holdings (International) might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that Luk Fook Holdings (International) is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 8.4% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing, we've spotted 1 warning sign facing Luk Fook Holdings (International) that you might find interesting.

While Luk Fook Holdings (International) 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.