Slowing Rates Of Return At Linklogis (HKG:9959) Leave Little Room For Excitement

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Linklogis (HKG:9959), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Linklogis:

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

0.025 = CN¥248m ÷ (CN¥14b - CN¥4.3b) (Based on the trailing twelve months to June 2022).

Thus, Linklogis has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Software industry average of 3.6%.

Check out the opportunities and risks within the HK Software industry.

In the above chart we have measured Linklogis' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Linklogis.

What The Trend Of ROCE Can Tell Us

Over the past one year, Linklogis' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Linklogis doesn't end up being a multi-bagger in a few years time.

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 one year. This is intriguing because if current liabilities hadn't increased to 30% of total assets, this reported ROCE would probably be less than2.5% because total capital employed would be higher.The 2.5% ROCE could be even lower if current liabilities weren't 30% 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.

What We Can Learn From Linklogis' ROCE

In a nutshell, Linklogis has been trudging along with the same returns from the same amount of capital over the last one year. And investors appear hesitant that the trends will pick up because the stock has fallen 46% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 2 warning signs for Linklogis that we think you should be aware of.

While Linklogis 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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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.