Some Investors May Be Worried About i-Control Holdings' (HKG:1402) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think i-Control Holdings (HKG:1402) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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 i-Control Holdings, this is the formula:

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

0.05 = HK$8.7m ÷ (HK$244m - HK$67m) (Based on the trailing twelve months to March 2022).

So, i-Control Holdings has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the IT industry average of 7.0%.

View our latest analysis for i-Control Holdings

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

What Can We Tell From i-Control Holdings' ROCE Trend?

In terms of i-Control Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 18%, but since then they've fallen to 5.0%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From i-Control Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that i-Control Holdings is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 24% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to know some of the risks facing i-Control Holdings we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.

While i-Control Holdings 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.