The Returns On Capital At Lvji Technology Holdings (HKG:1745) Don't Inspire Confidence

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Although, when we looked at Lvji Technology Holdings (HKG:1745), it didn't seem to tick all of these boxes.

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%. In absolute terms, that's a low return and it also under-performs the Software industry average of 5.9%.

See our latest analysis for Lvji Technology Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lvji Technology Holdings' ROCE against it's prior returns. If you're interested in investigating Lvji Technology Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Lvji Technology Holdings' ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 32% four years ago, while capital employed has grown 2,129%. Usually this isn't ideal, but given Lvji Technology Holdings conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. 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. It's also worth noting the company's latest EBIT figure is within 10% of the previous year, so it's fair to assign the ROCE drop largely to the capital raise.

The Key Takeaway

In summary, we're somewhat concerned by Lvji Technology Holdings' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 26% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Lvji Technology Holdings (including 1 which can't be ignored) .

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.

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.

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