Be Wary Of Hi-Level Technology Holdings (HKG:8113) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Hi-Level Technology Holdings (HKG:8113), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hi-Level Technology Holdings:

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

0.24 = HK$40m ÷ (HK$559m - HK$390m) (Based on the trailing twelve months to December 2020).

Thus, Hi-Level Technology Holdings has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Electronic industry average of 8.1%.

Check out our latest analysis for Hi-Level Technology Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hi-Level Technology Holdings' ROCE against it's prior returns. If you're interested in investigating Hi-Level Technology Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Hi-Level Technology Holdings' ROCE Trending?

In terms of Hi-Level Technology Holdings' historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 33%, but they have dropped over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Hi-Level Technology Holdings has a high ratio of current liabilities to total assets of 70%. 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.

What We Can Learn From Hi-Level Technology Holdings' ROCE

While returns have fallen for Hi-Level Technology Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 29% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you want to know some of the risks facing Hi-Level Technology Holdings we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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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