CCID Consulting's (HKG:8235) Returns Have Hit A Wall

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at CCID Consulting's (HKG:8235) ROCE trend, we were pretty happy with what we saw.

What is 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. Analysts use this formula to calculate it for CCID Consulting:

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

0.11 = CN¥29m ÷ (CN¥398m - CN¥143m) (Based on the trailing twelve months to December 2020).

Thus, CCID Consulting has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 7.1% it's much better.

See our latest analysis for CCID Consulting

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're interested in investigating CCID Consulting's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For CCID Consulting Tell Us?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 59% in that time. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 36% of total assets, this reported ROCE would probably be less than11% because total capital employed would be higher.The 11% ROCE could be even lower if current liabilities weren't 36% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Bottom Line On CCID Consulting's ROCE

In the end, CCID Consulting has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 5.6% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if CCID Consulting is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

CCID Consulting does have some risks though, and we've spotted 3 warning signs for CCID Consulting that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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