What Do The Returns At China ITS (Holdings) (HKG:1900) Mean Going Forward?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 on that note, China ITS (Holdings) (HKG:1900) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

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

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

0.017 = CN¥35m ÷ (CN¥3.8b - CN¥1.7b) (Based on the trailing twelve months to June 2020).

Therefore, China ITS (Holdings) has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the IT industry average of 8.6%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of China ITS (Holdings), check out these free graphs here.

How Are Returns Trending?

We're delighted to see that China ITS (Holdings) is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 1.7%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

One more thing to note, China ITS (Holdings) has decreased current liabilities to 45% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line On China ITS (Holdings)'s ROCE

As discussed above, China ITS (Holdings) appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. However the stock is down a substantial 80% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

One final note, you should learn about the 2 warning signs we've spotted with China ITS (Holdings) (including 1 which is doesn't sit too well with us) .

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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