Investors Could Be Concerned With Confidence Intelligence Holdings' (HKG:1967) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Although, when we looked at Confidence Intelligence Holdings (HKG:1967), it didn't seem to tick all of these boxes.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.052 = CN¥16m ÷ (CN¥384m - CN¥73m) (Based on the trailing twelve months to December 2020).

So, Confidence Intelligence Holdings has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 8.1%.

Check out our latest analysis for Confidence Intelligence Holdings

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

How Are Returns Trending?

In terms of Confidence Intelligence Holdings' historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 41%, but since then they've fallen to 5.2%. 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 Confidence Intelligence Holdings' ROCE

We're a bit apprehensive about Confidence Intelligence Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these poor fundamentals, the stock has gained a huge 121% over the last year, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Confidence Intelligence Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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. 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.
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