To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Hangzhou Hikvision Digital Technology (SZSE:002415) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Hangzhou Hikvision Digital Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = CN¥16b ÷ (CN¥119b - CN¥33b) (Based on the trailing twelve months to December 2023).
Thus, Hangzhou Hikvision Digital Technology has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.1% it's much better.
SZSE:002415 Return on Capital Employed February 12th 2024
Above you can see how the current ROCE for Hangzhou Hikvision Digital Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hangzhou Hikvision Digital Technology.
What Can We Tell From Hangzhou Hikvision Digital Technology's ROCE Trend?
In terms of Hangzhou Hikvision Digital Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 39%, but since then they've fallen to 19%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, Hangzhou Hikvision Digital Technology has decreased its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line On Hangzhou Hikvision Digital Technology's ROCE
To conclude, we've found that Hangzhou Hikvision Digital Technology is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 12% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Like most companies, Hangzhou Hikvision Digital Technology does come with some risks, and we've found 1 warning sign that you should be aware of.
While Hangzhou Hikvision Digital 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.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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.
