To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Hanwei Electronics Group (SZSE:300007) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for Hanwei Electronics Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0018 = CN¥8.1m ÷ (CN¥6.1b - CN¥1.6b) (Based on the trailing twelve months to September 2024).
Therefore, Hanwei Electronics Group has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.7%.
In the above chart we have measured Hanwei Electronics Group'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 analyst report for Hanwei Electronics Group .
So How Is Hanwei Electronics Group's ROCE Trending?
In terms of Hanwei Electronics Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.6%, but since then they've fallen to 0.2%. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Hanwei Electronics Group's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 38% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Like most companies, Hanwei Electronics Group does come with some risks, and we've found 2 warning signs that you should be aware of.
While Hanwei Electronics Group 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.
