There Are Reasons To Feel Uneasy About Bortex Global's (HKG:8118) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Bortex Global (HKG:8118), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Bortex Global is:

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

0.036 = HK$6.7m ÷ (HK$231m - HK$45m) (Based on the trailing twelve months to April 2022).

Thus, Bortex Global has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.7%.

View our latest analysis for Bortex Global

Historical performance is a great place to start when researching a stock so above you can see the gauge for Bortex Global's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Bortex Global, check out these free graphs here.

So How Is Bortex Global's ROCE Trending?

When we looked at the ROCE trend at Bortex Global, we didn't gain much confidence. Around five years ago the returns on capital were 59%, but since then they've fallen to 3.6%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Bortex Global has done well to pay down its current liabilities to 20% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, we're somewhat concerned by Bortex Global's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 22% in the last three years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know more about Bortex Global, we've spotted 4 warning signs, and 1 of them shouldn't be ignored.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.