There Are Reasons To Feel Uneasy 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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Novacon Technology Group (HKG:8635) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Novacon Technology Group, this is the formula:

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

0.11 = HK$13m ÷ (HK$131m - HK$16m) (Based on the trailing twelve months to June 2021).

So, Novacon Technology Group has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 4.3% it's much better.

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.

What Can We Tell From Novacon Technology Group's ROCE Trend?

On the surface, the trend of ROCE at Novacon Technology Group doesn't inspire confidence. Over the last four years, returns on capital have decreased to 11% from 41% four years ago. However it looks like Novacon Technology Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that Novacon Technology Group is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 20% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing Novacon Technology Group we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

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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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.
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