There Are Reasons To Feel Uneasy About Bright Future Technology Holdings' (HKG:1351) Returns On Capital

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Bright Future Technology Holdings (HKG:1351), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Bright Future Technology Holdings is:

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

0.12 = CN¥24m ÷ (CN¥479m - CN¥280m) (Based on the trailing twelve months to December 2023).

So, Bright Future Technology Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.8% generated by the Media industry.

See 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Bright Future Technology Holdings.

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

The trend of ROCE doesn't look fantastic because it's fallen from 52% five years ago, while the business's capital employed increased by 127%. Usually this isn't ideal, but given Bright Future Technology Holdings conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Bright Future Technology Holdings' earnings and if they change as a result from the capital raise.

On a separate but related note, it's important to know that Bright Future Technology Holdings has a current liabilities to total assets ratio of 59%, which we'd consider pretty high. 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.

In Conclusion...

While returns have fallen for Bright Future Technology Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 46% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Bright Future Technology Holdings does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those make us uncomfortable...

While Bright Future Technology Holdings 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.