What Should You Know About HengTen Networks Group Limited’s (HKG:136) Return On Capital?

This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in HengTen Networks Group Limited (HKG:136).

Purchasing HengTen Networks Group gives you an ownership stake in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. Your return is tied to 136’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently HengTen Networks Group is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

Check out our latest analysis for HengTen Networks Group

Calculating Return On Capital Employed for 136

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at HengTen Networks Group’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. 136’s ROCE is calculated below:

ROCE Calculation for 136

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = CN¥220m ÷ (CN¥1.4b – CN¥364m) = 21%

136’s 21% ROCE means that for every HK$100 you invest, the company creates HK$21. Comparing this to a healthy 15% benchmark shows HengTen Networks Group is currently able to return a strong amount to owners for the use of their capital, which is a good sign for those who believe this will continue and the company’s management will find good uses for the earnings they create.

SEHK:136 Last Perf October 11th 18
SEHK:136 Last Perf October 11th 18

Not so fast

Although HengTen Networks Group is in a favourable position, you should know that this could change if the company is unable to maintain a strong ROCE above the benchmark, which will depend on the behaviour of the underlying variables (EBT and capital employed). So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking at the past 3 year period shows us that 136 boosted investor return on capital employed from -66%. Similarly, the movement in the earnings variable shows a jump from -CN¥66m to CN¥220m whilst capital employed improved as well albeit by a relatively smaller amount, signifying ROCE increased as a result of a greater surge in earnings compared to the business’ use of capital.

Next Steps

HengTen Networks Group’s ROCE has increased in the recent past and is above a benchmark that makes the company a potentially attractive stock that can achieve a solid return on investment. This is an ideal situation to be in, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. Without considering these fundamentals, you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. HengTen Networks Group’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

  1. Future Outlook: What are well-informed industry analysts predicting for 136’s future growth? Take a look at our free research report of analyst consensus for 136’s outlook.
  2. Valuation: What is 136 worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 136 is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.