There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at Hichain LogisticsLtd (SZSE:300873), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Hichain LogisticsLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = CN¥195m ÷ (CN¥3.7b - CN¥593m) (Based on the trailing twelve months to September 2023).
Therefore, Hichain LogisticsLtd has an ROCE of 6.2%. In absolute terms, that's a low return but it's around the Logistics industry average of 7.1%.
See our latest analysis for Hichain LogisticsLtd
In the above chart we have measured Hichain LogisticsLtd'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 Hichain LogisticsLtd.
What Can We Tell From Hichain LogisticsLtd's ROCE Trend?
Unfortunately, the trend isn't great with ROCE falling from 16% five years ago, while capital employed has grown 396%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Hichain LogisticsLtd 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.
In Conclusion...
In summary, Hichain LogisticsLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 28% in the last three years. Therefore based on the analysis done in this article, we don't think Hichain LogisticsLtd has the makings of a multi-bagger.
Hichain LogisticsLtd does have some risks, we noticed 5 warning signs (and 1 which is a bit unpleasant) we think you should know about.
While Hichain LogisticsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.