Asiainfo Technologies (HKG:1675) Shareholders Will Want The ROCE Trajectory To Continue

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Asiainfo Technologies (HKG:1675) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Asiainfo Technologies:

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

0.11 = CN¥633m ÷ (CN¥8.9b - CN¥3.1b) (Based on the trailing twelve months to December 2020).

Thus, Asiainfo Technologies has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Software industry.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Asiainfo Technologies Tell Us?

Asiainfo Technologies is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 55% more capital is being employed now too. So we're very much inspired by what we're seeing at Asiainfo Technologies thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 35%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

In summary, it's great to see that Asiainfo Technologies can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 27% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Asiainfo Technologies can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 2 warning signs with Asiainfo Technologies and understanding these should be part of your investment process.

While Asiainfo Technologies 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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