Computer And Technologies Holdings (HKG:46) Could Be At Risk Of Shrinking As A Company

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Computer And Technologies Holdings (HKG:46) we aren't filled with optimism, but let's investigate further.

Understanding 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 Computer And Technologies Holdings, this is the formula:

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

0.051 = HK$27m ÷ (HK$666m - HK$137m) (Based on the trailing twelve months to June 2024).

Thus, Computer And Technologies Holdings has an ROCE of 5.1%. In absolute terms, that's a low return but it's around the IT industry average of 6.0%.

Check out our latest analysis for Computer And Technologies Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Computer And Technologies Holdings' ROCE against it's prior returns. If you're interested in investigating Computer And Technologies Holdings' past further, check out this free graph covering Computer And Technologies Holdings' past earnings, revenue and cash flow.

What Does the ROCE Trend For Computer And Technologies Holdings Tell Us?

In terms of Computer And Technologies Holdings' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 12% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Computer And Technologies Holdings to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Computer And Technologies Holdings is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 24% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Computer And Technologies Holdings we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Computer And Technologies 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.