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

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in China ITS (Holdings)'s (HKG:1900) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on China ITS (Holdings) is:

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

0.072 = CN¥137m ÷ (CN¥2.8b - CN¥944m) (Based on the trailing twelve months to December 2022).

Thus, China ITS (Holdings) has an ROCE of 7.2%. Even though it's in line with the industry average of 7.2%, it's still a low return by itself.

Check out our latest analysis for China ITS (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 China ITS (Holdings)'s past further, check out this free graph of past earnings, revenue and cash flow.

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

You'd find it hard not to be impressed with the ROCE trend at China ITS (Holdings). The figures show that over the last five years, returns on capital have grown by 191%. The company is now earning CN¥0.07 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 20% less capital than it was five years ago. 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 33%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

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. Given the stock has declined 61% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

China ITS (Holdings) does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While China ITS (Holdings) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.