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Returns Are Gaining Momentum At China Technology Industry Group (HKG:8111)
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at China Technology Industry Group (HKG:8111) and its trend of ROCE, we really liked what we saw.
What is 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. The formula for this calculation on China Technology Industry Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = CN¥1.8m ÷ (CN¥166m - CN¥81m) (Based on the trailing twelve months to March 2022).
Therefore, China Technology Industry Group has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 9.3%.
View our latest analysis for China Technology Industry Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for China Technology Industry Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of China Technology Industry Group, check out these free graphs here.
How Are Returns Trending?
We're delighted to see that China Technology Industry Group is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 2.1% on its capital. While returns have increased, the amount of capital employed by China Technology Industry Group has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
On a side note, China Technology Industry Group's current liabilities are still rather high at 49% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
As discussed above, China Technology Industry Group appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Given the stock has declined 58% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On a final note, we've found 1 warning sign for China Technology Industry Group that we think you should be aware of.
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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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.
About SEHK:8111
China Technology Industry Group
An investment holding company, engages in the energy power system integration business and sale of renewable energy products in the People's Republic of China.
Medium-low and slightly overvalued.