ECI Technology Holdings (HKG:8013) Is Experiencing Growth In Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at ECI Technology Holdings (HKG:8013) so let's look a bit deeper.

What Is 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. To calculate this metric for ECI Technology Holdings, this is the formula:

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

0.097 = HK$8.3m ÷ (HK$107m - HK$22m) (Based on the trailing twelve months to February 2024).

So, ECI Technology Holdings has an ROCE of 9.7%. On its own that's a low return, but compared to the average of 7.0% generated by the Commercial Services industry, it's much better.

See our latest analysis for ECI Technology Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for ECI Technology Holdings' ROCE against it's prior returns. If you're interested in investigating ECI Technology Holdings' past further, check out this free graph covering ECI Technology Holdings' past earnings, revenue and cash flow.

What Does the ROCE Trend For ECI Technology Holdings Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.7%. The amount of capital employed has increased too, by 50%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On ECI Technology Holdings' ROCE

In summary, it's great to see that ECI Technology Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 61% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing, we've spotted 2 warning signs facing ECI Technology Holdings that you might find interesting.

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.