Some Investors May Be Worried About Novacon Technology Group's (HKG:8635) Returns On Capital

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. 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. Having said that, from a first glance at Novacon Technology Group (HKG:8635) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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)

0.13 = HK$15m ÷ (HK$136m - HK$15m) (Based on the trailing twelve months to December 2021).

Therefore, Novacon Technology Group has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Software industry.

See our latest analysis for Novacon Technology Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Novacon Technology Group's ROCE against it's prior returns. 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?

On the surface, the trend of ROCE at Novacon Technology Group doesn't inspire confidence. To be more specific, ROCE has fallen from 40% over the last four years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Novacon Technology Group's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Novacon Technology Group. But since the stock has dived 84% in the last three years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

If you'd like to know about the risks facing Novacon Technology Group, we've discovered 1 warning sign that you should be aware of.

While Novacon Technology Group 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.