What Can The Trends At Glory Mark Hi-Tech (Holdings) (HKG:8159) Tell Us About Their Returns?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Glory Mark Hi-Tech (Holdings)'s (HKG:8159) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Glory Mark Hi-Tech (Holdings), this is the formula:

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

0.076 = HK$11m ÷ (HK$271m - HK$129m) (Based on the trailing twelve months to September 2020).

Thus, Glory Mark Hi-Tech (Holdings) has an ROCE of 7.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.7%.

See our latest analysis for Glory Mark Hi-Tech (Holdings)

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

How Are Returns Trending?

We're delighted to see that Glory Mark Hi-Tech (Holdings) is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 7.6%, which is always encouraging. While returns have increased, the amount of capital employed by Glory Mark Hi-Tech (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.

Another thing to note, Glory Mark Hi-Tech (Holdings) has a high ratio of current liabilities to total assets of 48%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

As discussed above, Glory Mark Hi-Tech (Holdings) appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 64% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Glory Mark Hi-Tech (Holdings) does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

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. 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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