There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Linktel Technologies (SZSE:301205) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Linktel Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = CN¥16m ÷ (CN¥1.7b - CN¥228m) (Based on the trailing twelve months to September 2023).
Thus, Linktel Technologies has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.0%.
Check out our latest analysis for Linktel Technologies
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Linktel Technologies has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Linktel Technologies' ROCE Trend?
When we looked at the ROCE trend at Linktel Technologies, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 1.1% from 16% four years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
Our Take On Linktel Technologies' ROCE
We're a bit apprehensive about Linktel Technologies because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 441% over the last year, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
Linktel Technologies does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.
While Linktel 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.