Returns On Capital At AsiaInfo Technologies (HKG:1675) Have Hit The Brakes

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at AsiaInfo Technologies' (HKG:1675) ROCE trend, we were pretty happy with what we saw.

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)

0.12 = CN¥815m ÷ (CN¥11b - CN¥4.3b) (Based on the trailing twelve months to December 2023).

Therefore, AsiaInfo Technologies has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 3.6% generated by the Software industry.

View our latest analysis for AsiaInfo Technologies

Above you can see how the current ROCE for AsiaInfo Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering AsiaInfo Technologies for free.

What Does the ROCE Trend For AsiaInfo Technologies Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 108% more capital into its operations. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, AsiaInfo Technologies has done well to reduce current liabilities to 38% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On AsiaInfo Technologies' ROCE

The main thing to remember is that AsiaInfo Technologies has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 0.9% over the last five years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

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

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

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