Bright Future Technology Holdings (HKG:1351) Is Reinvesting At Lower Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Having said that, from a first glance at Bright Future Technology Holdings (HKG:1351) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Bright Future Technology Holdings, this is the formula:

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

0.079 = CN¥17m ÷ (CN¥476m - CN¥262m) (Based on the trailing twelve months to June 2024).

So, Bright Future Technology Holdings has an ROCE of 7.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.0%.

View our latest analysis for Bright Future Technology Holdings

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

What Can We Tell From Bright Future Technology Holdings' ROCE Trend?

We weren't thrilled with the trend because Bright Future Technology Holdings' ROCE has reduced by 81% over the last five years, while the business employed 96% more capital. That being said, Bright Future Technology Holdings raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Bright Future Technology Holdings might not have received a full period of earnings contribution from it.

Another thing to note, Bright Future Technology Holdings has a high ratio of current liabilities to total assets of 55%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Bright Future Technology Holdings' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Bright Future Technology Holdings. These growth trends haven't led to growth returns though, since the stock has fallen 54% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we found 4 warning signs for Bright Future Technology Holdings (2 can't be ignored) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.