Returns on Capital Paint A Bright Future For CCID Consulting (HKG:2176)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Speaking of which, we noticed some great changes in CCID Consulting's (HKG:2176) returns on capital, so let's have a look.

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 CCID Consulting, this is the formula:

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

0.40 = CN¥91m ÷ (CN¥423m - CN¥196m) (Based on the trailing twelve months to June 2024).

Therefore, CCID Consulting has an ROCE of 40%. In absolute terms that's a great return and it's even better than the IT industry average of 6.0%.

See 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'd like to look at how CCID Consulting has performed in the past in other metrics, you can view this free graph of CCID Consulting's past earnings, revenue and cash flow.

So How Is CCID Consulting's ROCE Trending?

The trends we've noticed at CCID Consulting are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 40%. Basically the business is earning more per dollar of capital invested and in addition to that, 26% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 46% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From CCID Consulting's ROCE

In summary, it's great to see that CCID Consulting can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if CCID Consulting can keep these trends up, it could have a bright future ahead.

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

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.