What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Chanjet Information Technology’s (HKG:1588) returns on capital, so let’s have a look.
Understanding 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. Analysts use this formula to calculate it for Chanjet Information Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.0074 = CN¥9.8m ÷ (CN¥1.6b – CN¥283m) (Based on the trailing twelve months to December 2020).
So, Chanjet Information Technology has an ROCE of 0.7%. In absolute terms, that’s a low return and it also under-performs the Software industry average of 4.9%.
See our latest analysis for Chanjet Information Technology
SEHK:1588 Return on Capital Employed May 17th 2021
Above you can see how the current ROCE for Chanjet Information Technology compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Chanjet Information Technology here for free.
What Can We Tell From Chanjet Information Technology’s ROCE Trend?
Chanjet Information Technology has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it’s earning 0.7% which is a sight for sore eyes. In addition to that, Chanjet Information Technology is employing 44% more capital than previously which is expected of a company that’s 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.
The Bottom Line
Overall, Chanjet Information Technology gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 97% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.
Chanjet Information Technology does have some risks though, and we’ve spotted 3 warning signs for Chanjet Information Technology that you might be interested in.
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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