If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Speaking of which, we noticed some great changes in Hwatsing Technology's (SHSE:688120) returns on capital, so let's have a look.

What Is 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. To calculate this metric for Hwatsing Technology, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.10 = CN¥631m ÷ (CN¥8.7b - CN¥2.4b) (Based on the trailing twelve months to September 2023).

So, Hwatsing Technology has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 4.2% generated by the Semiconductor industry.

View our latest analysis for Hwatsing Technology

In the above chart we have measured Hwatsing Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hwatsing Technology here for free.

What Does the ROCE Trend For Hwatsing Technology Tell Us?

The fact that Hwatsing Technology is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses four years ago, but now it's earning 10% which is a sight for sore eyes. In addition to that, Hwatsing Technology is employing 2,755% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 28%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Hwatsing Technology's ROCE

To the delight of most shareholders, Hwatsing Technology has now broken into profitability. And with a respectable 14% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Hwatsing Technology can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for Hwatsing Technology that we think you should be aware of.

While Hwatsing Technology 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.