Asiainfo Technologies (HKG:1675) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 on that note, Asiainfo Technologies (HKG:1675) looks quite promising in regards to its trends of return on capital.

What Is 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 Asiainfo Technologies:

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

0.10 = CN¥670m ÷ (CN¥9.4b - CN¥2.9b) (Based on the trailing twelve months to June 2022).

Therefore, Asiainfo Technologies has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 4.9% it's much better.

Check out our latest analysis for Asiainfo Technologies

In the above chart we have measured Asiainfo Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Asiainfo Technologies.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Asiainfo Technologies are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 10%. The amount of capital employed has increased too, by 72%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 31%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Asiainfo Technologies has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Asiainfo Technologies' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Asiainfo Technologies has. Since the stock has returned a solid 39% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 1 warning sign facing Asiainfo Technologies that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.