To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Hangzhou Haoyue Personal Care (SHSE:605009) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 Haoyue Personal Care:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CN¥412m ÷ (CN¥4.6b - CN¥1.4b) (Based on the trailing twelve months to September 2023).
Thus, Hangzhou Haoyue Personal Care has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Personal Products industry.
In the above chart we have measured Hangzhou Haoyue Personal Care's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hangzhou Haoyue Personal Care.
How Are Returns Trending?
When we looked at the ROCE trend at Hangzhou Haoyue Personal Care, we didn't gain much confidence. Around five years ago the returns on capital were 49%, but since then they've fallen to 13%. 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 may take some time before the company starts to see any change in earnings from these investments.
On a side note, Hangzhou Haoyue Personal Care has done well to pay down its current liabilities to 30% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
Our Take On Hangzhou Haoyue Personal Care's ROCE
To conclude, we've found that Hangzhou Haoyue Personal Care is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 63% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Hangzhou Haoyue Personal Care has the makings of a multi-bagger.
On a separate note, we've found 1 warning sign for Hangzhou Haoyue Personal Care you'll probably want to know about.
While Hangzhou Haoyue Personal Care 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.