Returns On Capital At BOSA Technology Holdings (HKG:8140) Paint An Interesting Picture

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think BOSA Technology Holdings (HKG:8140) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on BOSA Technology Holdings is:

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

0.12 = HK$9.8m ÷ (HK$104m - HK$21m) (Based on the trailing twelve months to September 2020).

So, BOSA Technology Holdings has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 9.9% generated by the Commercial Services industry.

Check out our latest analysis for BOSA 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 BOSA Technology Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From BOSA Technology Holdings' ROCE Trend?

On the surface, the trend of ROCE at BOSA Technology Holdings doesn't inspire confidence. Around four years ago the returns on capital were 50%, but since then they've fallen to 12%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, BOSA Technology Holdings has done well to pay down its current liabilities to 20% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On BOSA Technology Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that BOSA Technology Holdings is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 89% over the last year, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

If you'd like to know about the risks facing BOSA Technology Holdings, we've discovered 2 warning signs that you should be aware of.

While BOSA Technology Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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