Returns On Capital At Novacon Technology Group (HKG:8635) Paint A Concerning Picture

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Novacon Technology Group (HKG:8635) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Novacon Technology Group is:

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

0.12 = HK$13m ÷ (HK$122m - HK$15m) (Based on the trailing twelve months to December 2020).

Therefore, Novacon Technology Group has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 5.2% it's much better.

See our latest analysis for Novacon Technology Group

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 want to delve into the historical earnings, revenue and cash flow of Novacon Technology Group, check out these free graphs here.

So How Is Novacon Technology Group's ROCE Trending?

When we looked at the ROCE trend at Novacon Technology Group, we didn't gain much confidence. Over the last three years, returns on capital have decreased to 12% from 40% three years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

In summary, Novacon Technology Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 17% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 1 warning sign facing Novacon Technology Group that you might find interesting.

While Novacon Technology Group 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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