What Do The Returns At L.K. Technology Holdings (HKG:558) Mean Going Forward?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, L.K. Technology Holdings (HKG:558) looks quite promising in regards to its trends of return on capital.

Understanding 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. Analysts use this formula to calculate it for L.K. Technology Holdings:

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

0.10 = HK$224m ÷ (HK$5.1b - HK$2.9b) (Based on the trailing twelve months to September 2020).

So, L.K. Technology Holdings has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.4% generated by the Machinery industry.

See our latest analysis for L.K. Technology Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating L.K. Technology Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For L.K. Technology Holdings Tell Us?

L.K. Technology Holdings has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 205% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 57% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On L.K. Technology Holdings' ROCE

To bring it all together, L.K. Technology Holdings has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 230% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing: We've identified 3 warning signs with L.K. Technology Holdings (at least 1 which is potentially serious) , and understanding them would certainly be useful.

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. 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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