If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Hangzhou Hirisun Technology's (SZSE:300277) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Hangzhou Hirisun Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.009 = CN¥4.5m ÷ (CN¥707m - CN¥203m) (Based on the trailing twelve months to September 2023).
So, Hangzhou Hirisun Technology has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Software industry average of 2.7%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hangzhou Hirisun Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hangzhou Hirisun Technology.
So How Is Hangzhou Hirisun Technology's ROCE Trending?
While there are companies with higher returns on capital out there, we still find the trend at Hangzhou Hirisun Technology promising. The figures show that over the last five years, ROCE has grown 20% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
In Conclusion...
In summary, we're delighted to see that Hangzhou Hirisun Technology has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 7.5% to shareholders. So with that in mind, we think the stock deserves further research.
On a final note, we found 2 warning signs for Hangzhou Hirisun Technology (1 is concerning) you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.