Intron Technology Holdings (HKG:1760) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Intron Technology Holdings (HKG:1760) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Intron Technology Holdings is:

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

0.12 = CN¥211m ÷ (CN¥2.9b - CN¥1.1b) (Based on the trailing twelve months to December 2021).

Thus, Intron Technology Holdings has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 5.3% it's much better.

Check out our latest analysis for Intron Technology Holdings

Above you can see how the current ROCE for Intron Technology Holdings 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 Intron Technology Holdings.

How Are Returns Trending?

When we looked at the ROCE trend at Intron Technology Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 37% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Intron Technology Holdings has decreased its current liabilities to 38% 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 Intron Technology Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Intron Technology Holdings is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 1.0% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One final note, you should learn about the 2 warning signs we've spotted with Intron Technology Holdings (including 1 which is significant) .

While Intron Technology Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.