CircuTech International Holdings' (HKG:8051) Returns On Capital Are Heading Higher

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at CircuTech International Holdings (HKG:8051) and its trend of ROCE, we really liked what we saw.

Understanding 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 CircuTech International Holdings:

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

0.022 = HK$3.6m ÷ (HK$173m - HK$12m) (Based on the trailing twelve months to March 2023).

So, CircuTech International Holdings has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 7.5%.

Check out our latest analysis for CircuTech International Holdings

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

So How Is CircuTech International Holdings' ROCE Trending?

Shareholders will be relieved that CircuTech International Holdings has broken into profitability. The company now earns 2.2% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by CircuTech International Holdings has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 6.9%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

In summary, we're delighted to see that CircuTech International Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 51% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, CircuTech International Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

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

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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.