Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Hengtong Logistics (SHSE:603223) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 Hengtong Logistics is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.018 = CN¥74m ÷ (CN¥4.6b - CN¥387m) (Based on the trailing twelve months to June 2023).
Thus, Hengtong Logistics has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 14%.
Check out our latest analysis for Hengtong Logistics
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hengtong Logistics' ROCE against it's prior returns. If you're interested in investigating Hengtong Logistics' past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Unfortunately, the trend isn't great with ROCE falling from 12% five years ago, while capital employed has grown 251%. That being said, Hengtong Logistics raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Hengtong Logistics probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
On a side note, Hengtong Logistics has done well to pay down its current liabilities to 8.4% of total assets. So we could link some of this to the decrease in ROCE. 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 Hengtong Logistics' ROCE
We're a bit apprehensive about Hengtong Logistics because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 171% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
On a final note, we've found 1 warning sign for Hengtong Logistics that we think 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.
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.