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. Although, when we looked at Hengxin Technology (HKG:1085), it didn't seem to tick all of these boxes.
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 Hengxin Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = CN¥137m ÷ (CN¥4.6b - CN¥934m) (Based on the trailing twelve months to June 2024).
So, Hengxin Technology has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 6.0%.
Check out our latest analysis for Hengxin Technology
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 Hengxin Technology has performed in the past in other metrics, you can view this free graph of Hengxin Technology's past earnings, revenue and cash flow.
What Can We Tell From Hengxin Technology's ROCE Trend?
We weren't thrilled with the trend because Hengxin Technology's ROCE has reduced by 59% over the last five years, while the business employed 123% more capital. That being said, Hengxin Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Hengxin Technology probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
Our Take On Hengxin Technology's ROCE
While returns have fallen for Hengxin Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 45% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
One final note, you should learn about the 4 warning signs we've spotted with Hengxin Technology (including 1 which doesn't sit too well with us) .
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.