Capital Allocation Trends At Technovator International (HKG:1206) Aren't Ideal

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Technovator International (HKG:1206) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Technovator International, this is the formula:

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

0.015 = CN¥45m ÷ (CN¥4.8b - CN¥1.8b) (Based on the trailing twelve months to December 2021).

So, Technovator International has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 6.0%.

Check out our latest analysis for Technovator International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Technovator International's ROCE against it's prior returns. If you'd like to look at how Technovator International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Technovator International Tell Us?

When we looked at the ROCE trend at Technovator International, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 1.5%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Technovator International's reinvestment in its own business, we're aware that returns are shrinking. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 83% in the last five years. Therefore based on the analysis done in this article, we don't think Technovator International has the makings of a multi-bagger.

Technovator International does have some risks, we noticed 5 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Technovator International 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.