Here’s What’s Happening With Returns At Capinfo (HKG:1075)

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Capinfo (HKG:1075) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Capinfo, this is the formula:

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

0.12 = CN¥136m ÷ (CN¥2.4b - CN¥1.2b) (Based on the trailing twelve months to June 2020).

So, Capinfo has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.6% generated by the IT industry.

Check out our latest analysis for Capinfo

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Capinfo's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Capinfo is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 12%. The amount of capital employed has increased too, by 20%. So we're very much inspired by what we're seeing at Capinfo thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 51% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

Our Take On Capinfo's ROCE

To sum it up, Capinfo has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 53% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know about the risks facing Capinfo, we've discovered 1 warning sign that you should be aware of.

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

If you’re looking to trade Capinfo, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.