# Computer And Technologies Holdings Limited (HKG:46): The Return Story

I am writing today to help inform people who are new to the stock market and want to begin learning the link between Computer And Technologies Holdings Limited (HKG:46)’s return fundamentals and stock market performance.

Buying Computer And Technologies Holdings makes you a partial owner of the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. To understand Computer And Technologies Holdings’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

### ROCE: Explanation and Calculation

As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Computer And Technologies Holdings is good at growing investor capital. I have calculated Computer And Technologies Holdings’s ROCE for you below:

ROCE Calculation for 46

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = HK\$65m ÷ (HK\$650m – HK\$185m) = 14%

46’s 14% ROCE means that for every HK\$100 you invest, the company creates HK\$14. This makes Computer And Technologies Holdings slightly mediocre when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital will be able to compound over time, but still may be missing out on some potential growth elsewhere.

### A deeper look

Computer And Technologies Holdings’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Computer And Technologies Holdings is in an adverse position, but this can change if these factors improve. Because of this, it is important to look beyond the final value of 46’s ROCE and understand what is happening to the individual components. Three years ago, 46’s ROCE was 12%, which means the company’s capital returns have improved. Similarly, the movement in the earnings variable shows a jump from HK\$53m to HK\$65m whilst capital employed improved as well albeit by a relatively smaller amount, signifying ROCE increased as a result of a greater surge in earnings compared to the business’ use of capital.

### Next Steps

Although Computer And Technologies Holdings’s ROCE is currently below the acceptable benchmark, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation to determine whether there is potential for return by focusing our attention elsewhere. Computer And Technologies Holdings’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

1. Future Outlook: What are well-informed industry analysts predicting for 46’s future growth? Take a look at our free research report of analyst consensus for 46’s outlook.
2. Valuation: What is 46 worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether 46 is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.