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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Hong Kong Technology Venture’s (HKG:1137) returns on capital, so let’s have a look.
What Is 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. To calculate this metric for Hong Kong Technology Venture, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.059 = HK$155m ÷ (HK$3.6b – HK$969m) (Based on the trailing twelve months to December 2022).
So, Hong Kong Technology Venture has an ROCE of 5.9%. In absolute terms, that’s a low return and it also under-performs the Consumer Retailing industry average of 10.0%.
See our latest analysis for Hong Kong Technology Venture
Above you can see how the current ROCE for Hong Kong Technology Venture compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Hong Kong Technology Venture.
So How Is Hong Kong Technology Venture’s ROCE Trending?
Hong Kong Technology Venture has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it’s now earning 5.9% on its capital. In addition to that, Hong Kong Technology Venture is employing 42% more capital than previously which is expected of a company that’s trying to break into profitability. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
What We Can Learn From Hong Kong Technology Venture’s ROCE
Overall, Hong Kong Technology Venture gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 38% to shareholders. So with that in mind, we think the stock deserves further research.
On a final note, we’ve found 1 warning sign for Hong Kong Technology Venture that we think you should be aware of.
While Hong Kong Technology Venture 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.
Valuation is complex, but we’re helping make it simple.
Find out whether Hong Kong Technology Venture is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
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