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

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. So when we looked at Famous Tech International Holdings (HKG:8100) and its trend of ROCE, we really liked what we saw.

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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. 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)

0.022 = HK$5.2m ÷ (HK$278m - HK$38m) (Based on the trailing twelve months to December 2024).

Therefore, Famous Tech International Holdings has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Software industry average of 4.8%.

See 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.

What Does the ROCE Trend For Famous Tech International Holdings Tell Us?

While the ROCE is still rather low for Famous Tech International Holdings, we're glad to see it heading in the right direction. We found that the returns on capital employed over the last five years have risen by 744%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 25% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Bottom Line

In the end, Famous Tech International Holdings has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 63% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know more about Famous Tech International Holdings, we've spotted 2 warning signs, and 1 of them is significant.

While Famous Tech International Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.