L.K. Technology Holdings' (HKG:558) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at L.K. Technology Holdings (HKG:558) so let's look a bit deeper.

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. The formula for this calculation on L.K. Technology Holdings is:

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

0.18 = HK$753m ÷ (HK$7.6b - HK$3.4b) (Based on the trailing twelve months to March 2022).

So, L.K. Technology Holdings has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 7.1% it's much better.

Check out the opportunities and risks within the HK Machinery industry.

In the above chart we have measured L.K. Technology Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is L.K. Technology Holdings' ROCE Trending?

Investors would be pleased with what's happening at L.K. Technology Holdings. The data shows that returns on capital have increased substantially over the last five years to 18%. The amount of capital employed has increased too, by 89%. So we're very much inspired by what we're seeing at L.K. Technology Holdings thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that L.K. Technology Holdings has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what L.K. Technology Holdings has. Since the stock has returned a staggering 786% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if L.K. Technology Holdings can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for L.K. Technology Holdings that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.