Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at HG Technologies (SZSE:300847) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on HG Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = CN¥97m ÷ (CN¥1.4b - CN¥110m) (Based on the trailing twelve months to September 2023).
Therefore, HG Technologies has an ROCE of 7.4%. On its own that's a low return, but compared to the average of 5.4% generated by the Commercial Services industry, it's much better.
Check out our latest analysis for HG Technologies
Historical performance is a great place to start when researching a stock so above you can see the gauge for HG Technologies' ROCE against it's prior returns. If you're interested in investigating HG Technologies' past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From HG Technologies' ROCE Trend?
When we looked at the ROCE trend at HG Technologies, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 7.4%. 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 side note, HG Technologies has done well to pay down its current liabilities to 7.8% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
What We Can Learn From HG Technologies' ROCE
In summary, HG Technologies is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 9.7% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
If you want to know some of the risks facing HG Technologies we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.
While HG Technologies 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.