Cheshi Technology (HKG:1490) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Cheshi Technology (HKG:1490) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Cheshi Technology:

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

0.091 = CN¥45m ÷ (CN¥560m - CN¥63m) (Based on the trailing twelve months to December 2021).

So, Cheshi Technology has an ROCE of 9.1%. On its own, that's a low figure but it's around the 8.1% average generated by the Media industry.

See our latest analysis for Cheshi Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cheshi Technology's ROCE against it's prior returns. If you'd like to look at how Cheshi Technology has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Cheshi Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 48% over the last four years. However it looks like Cheshi Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Cheshi Technology has decreased its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Bottom Line

To conclude, we've found that Cheshi Technology is reinvesting in the business, but returns have been falling. Since the stock has declined 45% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Cheshi Technology has the makings of a multi-bagger.

On a separate note, we've found 3 warning signs for Cheshi Technology you'll probably want to know about.

While Cheshi Technology 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.