Confidence Intelligence Holdings (HKG:1967) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Confidence Intelligence Holdings (HKG:1967), we don't think it's current trends fit the mold of a multi-bagger.

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 Confidence Intelligence Holdings:

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

0.011 = CN¥3.7m ÷ (CN¥381m - CN¥59m) (Based on the trailing twelve months to June 2022).

Therefore, Confidence Intelligence Holdings has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 7.3%.

Check out our latest analysis for Confidence Intelligence Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Confidence Intelligence Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Confidence Intelligence Holdings doesn't inspire confidence. Around five years ago the returns on capital were 35%, but since then they've fallen to 1.1%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Confidence Intelligence Holdings has decreased its current liabilities to 15% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Confidence Intelligence Holdings' ROCE

To conclude, we've found that Confidence Intelligence Holdings is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 750% return in the last three years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Confidence Intelligence Holdings does have some risks though, and we've spotted 1 warning sign for Confidence Intelligence Holdings that you might be interested in.

While Confidence Intelligence Holdings 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.