Investors Met With Slowing Returns on Capital At CCID Consulting (HKG:2176)

There are a few key trends to look for if we want to identify the next 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over CCID Consulting's (HKG:2176) trend of ROCE, we liked what we saw.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on CCID Consulting is:

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

0.12 = CN¥34m ÷ (CN¥441m - CN¥146m) (Based on the trailing twelve months to December 2021).

Therefore, CCID Consulting has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.1% generated by the IT industry.

Check out our latest analysis for CCID Consulting

Historical performance is a great place to start when researching a stock so above you can see the gauge for CCID Consulting's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of CCID Consulting, check out these free graphs here.

What Can We Tell From CCID Consulting's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 82% more capital in the last five years, and the returns on that capital have remained stable at 12%. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 33% of total assets, this reported ROCE would probably be less than12% because total capital employed would be higher.The 12% ROCE could be even lower if current liabilities weren't 33% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

In Conclusion...

To sum it up, CCID Consulting has simply been reinvesting capital steadily, at those decent rates of return. In light of this, the stock has only gained 1.8% over the last five years for shareholders who have owned the stock in this period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for CCID Consulting you'll probably want to know about.

While CCID Consulting 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.