Here's What's Concerning About Northking Information Technology's (SZSE:002987) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Northking Information Technology (SZSE:002987) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Northking Information Technology:

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

0.13 = CN¥312m ÷ (CN¥3.0b - CN¥547m) (Based on the trailing twelve months to September 2023).

Thus, Northking Information Technology has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 4.4% it's much better.

See our latest analysis for Northking Information Technology

In the above chart we have measured Northking Information Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Northking Information Technology .

What Can We Tell From Northking Information Technology's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 16% five years ago, while the business's capital employed increased by 456%. Usually this isn't ideal, but given Northking Information Technology conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Northking Information Technology might not have received a full period of earnings contribution from it.

On a related note, Northking Information Technology has decreased its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Northking Information Technology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Northking Information Technology. However, despite the promising trends, the stock has fallen 17% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Northking Information Technology does come with some risks, and we've found 1 warning sign that you should be aware of.

While Northking Information Technology 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.