Is There More Growth In Store For Asiainfo Technologies' (HKG:1675) Returns On Capital?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Asiainfo Technologies' (HKG:1675) returns on capital, so let's have a look.

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)

0.15 = CN¥644m ÷ (CN¥7.6b - CN¥3.4b) (Based on the trailing twelve months to June 2020).

Therefore, Asiainfo Technologies has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 3.4% 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'd like, you can check out the forecasts from the analysts covering Asiainfo Technologies here for free.

What Can We Tell From Asiainfo Technologies' ROCE Trend?

Asiainfo Technologies is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last four years, the ROCE has climbed 155% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Another thing to note, Asiainfo Technologies has a high ratio of current liabilities to total assets of 44%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Asiainfo Technologies' ROCE

To bring it all together, Asiainfo Technologies has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 30% return over the last year. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 3 warning signs with Asiainfo Technologies and understanding these should be part of your investment process.

While Asiainfo Technologies may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.
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