Returns on capital paint a bright future for CCID Consulting (HKG: 2176)

Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. Typically, we will want to notice a growth trend to return to on capital employed (ROCE) and at the same time, a based capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. So when we looked at the ROCE trend of Council CCID (HKG:2176) we really liked what we saw.

What is return on capital employed (ROCE)?

If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. To calculate this metric for CCID Consulting, here is the formula:

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

0.25 = CN¥65m ÷ (CN¥348m – CN¥89m) (Based on the last twelve months to June 2021).

So, CCID Consulting has a ROCE of 25%. In absolute terms, this is an excellent performance and is even better than the IT industry average of 6.3%.

Check out our latest analysis for CCID Consulting

SEHK:2176 Return on capital employed January 21, 2022

Historical performance is a great starting point when researching a stock. So you can see CCID Consulting’s ROCE gauge above against its past returns. If you want to see how CCID Consulting has performed in the past in other metrics, you can see this free chart of past profits, revenue and cash flow.

What does the ROCE trend tell us for CCID Consulting?

We love the trends we see from CCID Consulting. Figures show that over the past five years, returns generated on capital employed have increased significantly to 25%. The company actually makes more money per dollar of capital employed, and it should be noted that the amount of capital has also increased by 57%. Increasing returns on an increasing amount of capital are common among multi-baggers and that’s why we’re impressed.

By the way, we noticed that the improvement in ROCE seems to be partly fueled by an increase in current liabilities. Essentially, the company now has suppliers or short-term creditors funding about 26% of its operations, which is not ideal. It’s worth keeping an eye on this because as the percentage of current liabilities to total assets increases, certain aspects of risk also increase.

Our point of view on the ROCE of CCID Consulting

In summary, CCID Consulting has proven that it can reinvest in the business and generate higher returns on that capital employed, which is great. Investors may not yet be impressed by the favorable underlying trends, as over the past five years the stock has returned just 8.2% to shareholders. So with that in mind, we think the stock merits further research.

One more thing we spotted 3 warning signs in front of CCID Consulting which might interest you.

If you want to see other businesses earning high returns, check out our free list of companies earning high returns with strong balance sheets here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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