If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. So when we looked Chinese Technology Industry Group (HKG:8111) and its ROCE trend, we really liked what we saw.
What is return on capital employed (ROCE)?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on China Technology Industry Group is as follows:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.021 = CN¥1.8m ÷ (CN¥166m – CN¥81m) (Based on the last twelve months to March 2022).
Therefore, China Technology Industry Group posted a ROCE of 2.1%. In absolute terms, this is a poor performer and it also underperforms the tech industry average of 9.3%.
Check out our latest analysis for China Technology Industry Group
Historical performance is a great starting point for stock research. So above you can see China Technology Industry Group’s ROCE gauge compared to its past returns. If you want to dive deep into China Technology Industry Group’s earnings, revenue, and cash flow history, check out these free graphics here.
What is the return trend?
We are pleased to see that China Technology Industry Group is reaping the rewards of its investments and is now profitable. While the company was unprofitable in the past, it has now turned the tide and is earning 2.1% on its capital. Although yields increased, the amount of capital employed by China Technology Industry Group remained stable during the period. In the absence of a noticeable increase in capital employed, it is useful to know what the business plans to do in the future with respect to reinvestment and business growth. So if you’re looking for high growth, you’ll want to see a company’s capital employed grow as well.
Besides, current liabilities of China Technology Industry Group are still quite high at 49% of total assets. This effectively means that suppliers (or short-term creditors) finance a large part of the business, so just be aware that this may introduce some elements of risk. Ideally, we would like this to decrease, as this would mean fewer risky bonds.
The Key Takeaway
As noted above, China Technology Industry Group appears to be becoming more efficient at generating returns as capital employed has remained stable but earnings (before interest and taxes) are rising. Given that the stock has fallen 58% in the past five years, it could be a good investment if the valuation and other metrics are also attractive. That said, research into the company’s current valuation metrics and future prospects seems appropriate.
Finally we found 1 warning sign for China Technology Industry Group which we think you should be aware of.
If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.
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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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