Linklogis (HKG:9959) Will Be Hoping To Turn Its Returns On Capital Around

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Linklogis (HKG:9959), the trends above didn't look too great.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Linklogis:

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

0.005 = CN¥50m ÷ (CN¥12b - CN¥1.9b) (Based on the trailing twelve months to December 2022).

Therefore, Linklogis has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Software industry average of 5.5%.

Check out our latest analysis for Linklogis

In the above chart we have measured Linklogis' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Linklogis, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 3.2% that they were earning one year ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last one year. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Linklogis becoming one if things continue as they have.

The Bottom Line On Linklogis' ROCE

In summary, it's unfortunate that Linklogis is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 54% from where it was year ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.