What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Q Technology (Group) (HKG:1478) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Q Technology (Group) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = CN¥203m ÷ (CN¥14b - CN¥8.6b) (Based on the trailing twelve months to June 2024).
Thus, Q Technology (Group) has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.2%.
In the above chart we have measured Q Technology (Group)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Q Technology (Group) for free.
The Trend Of ROCE
On the surface, the trend of ROCE at Q Technology (Group) doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 3.8%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Q Technology (Group)'s current liabilities are still rather high at 62% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Q Technology (Group)'s ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Q Technology (Group) is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 53% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Q Technology (Group) could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 1478 on our platform quite valuable.
While Q Technology (Group) 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.
