There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at HAND Enterprise Solutions (SZSE:300170), it didn't seem to tick all of these boxes.
What Is 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. The formula for this calculation on HAND Enterprise Solutions is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = CN¥59m ÷ (CN¥6.0b - CN¥958m) (Based on the trailing twelve months to September 2023).
Thus, HAND Enterprise Solutions has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the IT industry average of 4.0%.
Check out our latest analysis for HAND Enterprise Solutions
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 HAND Enterprise Solutions' past further, check out this free graph of past earnings, revenue and cash flow.
So How Is HAND Enterprise Solutions' ROCE Trending?
Unfortunately, the trend isn't great with ROCE falling from 11% five years ago, while capital employed has grown 75%. That being said, HAND Enterprise Solutions raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence HAND Enterprise Solutions might not have received a full period of earnings contribution from it.
What We Can Learn From HAND Enterprise Solutions' ROCE
Bringing it all together, while we're somewhat encouraged by HAND Enterprise Solutions' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 43% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
If you want to know some of the risks facing HAND Enterprise Solutions we've found 5 warning signs (2 are potentially serious!) 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.