If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at HAND Enterprise Solutions (SZSE:300170) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on HAND Enterprise Solutions is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0012 = CN¥5.6m ÷ (CN¥5.3b - CN¥690m) (Based on the trailing twelve months to March 2022).
Therefore, HAND Enterprise Solutions has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the IT industry average of 5.4%.
View our latest analysis for HAND Enterprise Solutions
SZSE:300170 Return on Capital Employed July 7th 2022Historical performance is a great place to start when researching a stock so above you can see the gauge for HAND Enterprise Solutions' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of HAND Enterprise Solutions, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at HAND Enterprise Solutions doesn't inspire confidence. To be more specific, ROCE has fallen from 9.2% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for HAND Enterprise Solutions. These growth trends haven't led to growth returns though, since the stock has fallen 15% over 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 HAND Enterprise Solutions we've found 3 warning signs (2 are concerning!) that you should be aware of before investing here.
While HAND Enterprise Solutions 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.