China ITS (Holdings) (HKG:1900) Is Experiencing Growth In Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at China ITS (Holdings) (HKG:1900) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for China ITS (Holdings):

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

0.054 = CN¥100m ÷ (CN¥3.1b - CN¥1.3b) (Based on the trailing twelve months to June 2021).

So, China ITS (Holdings) has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the IT industry average of 7.2%.

See our latest analysis for China ITS (Holdings)

Historical performance is a great place to start when researching a stock so above you can see the gauge for China ITS (Holdings)'s ROCE against it's prior returns. If you'd like to look at how China ITS (Holdings) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For China ITS (Holdings) Tell Us?

We're pretty happy with how the ROCE has been trending at China ITS (Holdings). We found that the returns on capital employed over the last five years have risen by 52%. The company is now earning CN¥0.05 per dollar of capital employed. In regards to capital employed, China ITS (Holdings) appears to been achieving more with less, since the business is using 20% less capital to run its operation. China ITS (Holdings) may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a related note, the company's ratio of current liabilities to total assets has decreased to 41%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

What We Can Learn From China ITS (Holdings)'s ROCE

In the end, China ITS (Holdings) has proven it's capital allocation skills are good with those higher returns from less amount of capital. Although the company may be facing some issues elsewhere since the stock has plunged 77% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

On a final note, we found 3 warning signs for China ITS (Holdings) (1 makes us a bit uncomfortable) you should be aware of.

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.

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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.