Returns On Capital Are Showing Encouraging Signs At Famous Tech International Holdings (HKG:8100)

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. Speaking of which, we noticed some great changes in Famous Tech International Holdings' (HKG:8100) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Famous Tech International Holdings is:

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

0.015 = HK$3.6m ÷ (HK$276m - HK$37m) (Based on the trailing twelve months to June 2024).

Therefore, Famous Tech International Holdings has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Software industry average of 6.1%.

Check out our latest analysis for Famous Tech International Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Famous Tech International Holdings has performed in the past in other metrics, you can view this free graph of Famous Tech International Holdings' past earnings, revenue and cash flow.

So How Is Famous Tech International Holdings' ROCE Trending?

Like most people, we're pleased that Famous Tech International Holdings is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Famous Tech International Holdings is using 39% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Famous Tech International Holdings could be selling under-performing assets since the ROCE is improving.

What We Can Learn From Famous Tech International Holdings' ROCE

From what we've seen above, Famous Tech International Holdings has managed to increase it's returns on capital all the while reducing it's capital base. Although the company may be facing some issues elsewhere since the stock has plunged 73% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you'd like to know about the risks facing Famous Tech International Holdings, we've discovered 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.