To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Hangzhou Xili Intelligent TechnologyLtd (SHSE:688616), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for Hangzhou Xili Intelligent TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = CN¥63m ÷ (CN¥1.0b - CN¥238m) (Based on the trailing twelve months to September 2023).
So, Hangzhou Xili Intelligent TechnologyLtd has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 5.0% generated by the Electronic industry, it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hangzhou Xili Intelligent TechnologyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hangzhou Xili Intelligent TechnologyLtd, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at Hangzhou Xili Intelligent TechnologyLtd. The company has employed 125% more capital in the last five years, and the returns on that capital have remained stable at 7.9%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
On a side note, Hangzhou Xili Intelligent TechnologyLtd has done well to reduce current liabilities to 23% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
The Bottom Line
In conclusion, Hangzhou Xili Intelligent TechnologyLtd has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 37% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you want to continue researching Hangzhou Xili Intelligent TechnologyLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Hangzhou Xili Intelligent TechnologyLtd 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.