Investors Will Want Net-a-Go Technology's (HKG:1483) Growth In ROCE To Persist

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Net-a-Go Technology (HKG:1483) 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 Net-a-Go Technology:

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

0.043 = HK$30m ÷ (HK$845m - HK$151m) (Based on the trailing twelve months to June 2021).

Thus, Net-a-Go Technology has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.1%.

View our latest analysis for Net-a-Go Technology

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 want to delve into the historical earnings, revenue and cash flow of Net-a-Go Technology, check out these free graphs here.

So How Is Net-a-Go Technology's ROCE Trending?

We're delighted to see that Net-a-Go Technology is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.3% on its capital. In addition to that, Net-a-Go Technology is employing 663% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 18%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From Net-a-Go Technology's ROCE

In summary, it's great to see that Net-a-Go Technology has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 33% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 2 warning signs for Net-a-Go Technology you'll probably want to know about.

While Net-a-Go Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.