Be Wary Of Lvji Technology Holdings (HKG:1745) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Lvji Technology Holdings (HKG:1745) and its ROCE trend, we weren't exactly thrilled.

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 Lvji Technology Holdings:

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

0.031 = CN¥36m ÷ (CN¥1.2b - CN¥63m) (Based on the trailing twelve months to June 2021).

Thus, Lvji Technology Holdings has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Software industry average of 5.2%.

See our latest analysis for Lvji Technology Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Lvji Technology Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Lvji Technology Holdings' ROCE Trending?

We weren't thrilled with the trend because Lvji Technology Holdings' ROCE has reduced by 90% over the last four years, while the business employed 2,129% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Lvji Technology Holdings might not have received a full period of earnings contribution from it. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

What We Can Learn From Lvji Technology Holdings' ROCE

In summary, we're somewhat concerned by Lvji Technology Holdings' diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 68% over the last year, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Lvji Technology Holdings, we've spotted 3 warning signs, and 1 of them is significant.

While Lvji Technology Holdings 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. 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.