C-Link Squared (HKG:1463) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think C-Link Squared (HKG:1463) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 C-Link Squared is:

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

0.0089 = RM2.9m ÷ (RM338m - RM18m) (Based on the trailing twelve months to June 2024).

Therefore, C-Link Squared has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 9.3%.

See our latest analysis for C-Link Squared

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 C-Link Squared's past further, check out this free graph covering C-Link Squared's past earnings, revenue and cash flow.

So How Is C-Link Squared's ROCE Trending?

When we looked at the ROCE trend at C-Link Squared, we didn't gain much confidence. Around five years ago the returns on capital were 38%, but since then they've fallen to 0.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that C-Link Squared is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 57% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

C-Link Squared does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those don't sit too well with us...

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.