Here’s What’s Happening With Returns At CircuTech International Holdings (HKG:8051)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So when we looked at CircuTech International Holdings (HKG:8051) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on CircuTech International Holdings is:

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

0.079 = HK$11m ÷ (HK$171m - HK$32m) (Based on the trailing twelve months to September 2020).

So, CircuTech International Holdings has an ROCE of 7.9%. Even though it's in line with the industry average of 7.7%, it's still a low return by itself.

View 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.

How Are Returns Trending?

CircuTech International Holdings has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 7.9% on its capital. Not only that, but the company is utilizing 77% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 19% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From CircuTech International Holdings' ROCE

To the delight of most shareholders, CircuTech International Holdings has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 68% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to continue researching CircuTech International Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.

While CircuTech International 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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