What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 Han's Laser Technology Industry Group (SZSE:002008), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Han's Laser Technology Industry Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = CN¥585m ÷ (CN¥36b - CN¥15b) (Based on the trailing twelve months to September 2023).
Thus, Han's Laser Technology Industry Group has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.1%.
See our latest analysis for Han's Laser Technology Industry Group
Above you can see how the current ROCE for Han's Laser Technology Industry Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Han's Laser Technology Industry Group here for free.
The Trend Of ROCE
When we looked at the ROCE trend at Han's Laser Technology Industry Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.8% from 16% five years ago. However it looks like Han's Laser Technology Industry Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.
Another thing to note, Han's Laser Technology Industry Group has a high ratio of current liabilities to total assets of 41%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Han's Laser Technology Industry Group's ROCE
To conclude, we've found that Han's Laser Technology Industry Group is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 26% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
Like most companies, Han's Laser Technology Industry Group does come with some risks, and we've found 2 warning signs that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.