To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Although, when we looked at Hengxin Technology (HKG:1085), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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).
Therefore, Hengxin Technology has an ROCE of 3.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.7%.
View 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're interested in investigating Hengxin Technology's past further, check out this free graph covering Hengxin Technology's past earnings, revenue and cash flow.
What Can We Tell From Hengxin Technology's ROCE Trend?
The trend of ROCE doesn't look fantastic because it's fallen from 9.0% five years ago, while the business's capital employed increased by 123%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hengxin Technology's earnings and if they change as a result from the capital raise.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that Hengxin Technology is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 30% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
If you want to know some of the risks facing Hengxin Technology we've found 4 warning signs (1 can't be ignored!) that you should be aware of before investing here.
While Hengxin Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.