Investors Will Want Hong Kong Technology Venture's (HKG:1137) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Hong Kong Technology Venture (HKG:1137) so let's look a bit deeper.

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 Hong Kong Technology Venture is:

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

0.024 = HK$62m ÷ (HK$3.6b - HK$970m) (Based on the trailing twelve months to June 2023).

Therefore, Hong Kong Technology Venture has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 9.4%.

View our latest analysis for Hong Kong Technology Venture

In the above chart we have measured Hong Kong Technology Venture's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hong Kong Technology Venture here for free.

How Are Returns Trending?

We're delighted to see that Hong Kong Technology Venture 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 2.4% on its capital. In addition to that, Hong Kong Technology Venture is employing 55% 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.

Our Take On Hong Kong Technology Venture's ROCE

To the delight of most shareholders, Hong Kong Technology Venture has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 12% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

While Hong Kong Technology Venture looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 1137 is currently trading for a fair price.

While Hong Kong Technology Venture 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.