Confidence Intelligence Holdings (HKG:1967) Might Be Having Difficulty Using Its Capital Effectively

By
Simply Wall St
Published
November 29, 2021
SEHK:1967
Source: Shutterstock

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Confidence Intelligence Holdings (HKG:1967) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Confidence Intelligence Holdings is:

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

0.059 = CN¥19m ÷ (CN¥432m - CN¥104m) (Based on the trailing twelve months to June 2021).

So, Confidence Intelligence Holdings has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 7.9%.

View our latest analysis for Confidence Intelligence Holdings

roce
SEHK:1967 Return on Capital Employed November 29th 2021

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.

How Are Returns Trending?

On the surface, the trend of ROCE at Confidence Intelligence Holdings doesn't inspire confidence. Around four years ago the returns on capital were 34%, but since then they've fallen to 5.9%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Confidence Intelligence Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Confidence Intelligence Holdings is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 144% to shareholders in the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 4 warning signs we've spotted with Confidence Intelligence Holdings (including 2 which don't sit too well with us) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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