Hong Kong Technology Venture (HKG:1137) Shareholders Will Want The ROCE Trajectory To Continue

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Hong Kong Technology Venture's (HKG:1137) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hong Kong Technology Venture:

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

0.025 = HK$61m ÷ (HK$3.1b - HK$597m) (Based on the trailing twelve months to June 2021).

So, Hong Kong Technology Venture has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Online Retail industry average of 12%.

See our latest analysis for Hong Kong Technology Venture

Above you can see how the current ROCE for Hong Kong Technology Venture compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hong Kong Technology Venture here for free.

What Does the ROCE Trend For Hong Kong Technology Venture Tell Us?

Hong Kong Technology Venture has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 2.5% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In Conclusion...

To sum it up, Hong Kong Technology Venture is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Hong Kong Technology Venture can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Hong Kong Technology Venture that we think you should be aware of.

While Hong Kong Technology Venture isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.