Capital Allocation Trends At Computime Group (HKG:320) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 investigating Computime Group (HKG:320), 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 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. The formula for this calculation on Computime Group is:

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

0.051 = HK$75m ÷ (HK$2.5b - HK$1.0b) (Based on the trailing twelve months to March 2021).

Therefore, Computime Group has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.5%.

Check out our latest analysis for Computime Group

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

So How Is Computime Group's ROCE Trending?

When we looked at the ROCE trend at Computime Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Computime Group has a high ratio of current liabilities to total assets of 41%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Computime Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Computime Group is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 0.9% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Computime Group does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While Computime Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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