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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at AsiaInfo Technologies (HKG:1675) 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. To calculate this metric for AsiaInfo Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = CN¥524m ÷ (CN¥10b - CN¥3.5b) (Based on the trailing twelve months to June 2024).
Therefore, AsiaInfo Technologies has an ROCE of 8.0%. On its own that's a low return, but compared to the average of 6.0% generated by the Software industry, it's much better.
View our latest analysis for AsiaInfo Technologies
Above you can see how the current ROCE for AsiaInfo Technologies 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 AsiaInfo Technologies for free.
What Does the ROCE Trend For AsiaInfo Technologies Tell Us?
In terms of AsiaInfo Technologies' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.0% from 11% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
In Conclusion...
To conclude, we've found that AsiaInfo Technologies is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 16% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think AsiaInfo Technologies has the makings of a multi-bagger.
On a final note, we found 4 warning signs for AsiaInfo Technologies (1 is concerning) you should be aware of.
While AsiaInfo Technologies may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.