Technovator International (HKG:1206) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Technovator International (HKG:1206), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Technovator International is:

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

0.012 = CN¥35m ÷ (CN¥4.8b - CN¥1.9b) (Based on the trailing twelve months to June 2022).

So, Technovator International has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.4%.

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 want to delve into the historical earnings, revenue and cash flow of Technovator International, check out these free graphs here.

What Can We Tell From Technovator International's ROCE Trend?

In terms of Technovator International's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.2% from 12% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Technovator International's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Technovator International have fallen, meanwhile the business is employing more capital than it was five years ago. This could explain why the stock has sunk a total of 77% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Technovator International, we've spotted 4 warning signs, and 1 of them is a bit concerning.

While Technovator International 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.