The Returns On Capital At Pangaea Connectivity Technology (HKG:1473) Don't Inspire Confidence

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Pangaea Connectivity Technology (HKG:1473) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. Analysts use this formula to calculate it for Pangaea Connectivity Technology:

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

0.066 = HK$18m ÷ (HK$794m - HK$517m) (Based on the trailing twelve months to March 2022).

So, Pangaea Connectivity Technology has an ROCE of 6.6%. On its own, that's a low figure but it's around the 6.3% average generated by the Electronic industry.

See our latest analysis for Pangaea Connectivity Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pangaea Connectivity Technology's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Pangaea Connectivity Technology, check out these free graphs here.

What Can We Tell From Pangaea Connectivity Technology's ROCE Trend?

In terms of Pangaea Connectivity Technology's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 48%, but since then they've fallen to 6.6%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Pangaea Connectivity Technology has decreased its current liabilities to 65% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On Pangaea Connectivity Technology's ROCE

We're a bit apprehensive about Pangaea Connectivity Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 40% 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 want to know some of the risks facing Pangaea Connectivity Technology we've found 6 warning signs (2 can't be ignored!) that you should be aware of before investing here.

While Pangaea Connectivity Technology 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.