Be Wary Of Hymson Laser Technology GroupLtd (SHSE:688559) And Its Returns On Capital

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Hymson Laser Technology GroupLtd (SHSE:688559), it didn't seem to tick all of these boxes.

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. To calculate this metric for Hymson Laser Technology GroupLtd, this is the formula:

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

0.033 = CN¥142m ÷ (CN¥12b - CN¥7.5b) (Based on the trailing twelve months to September 2024).

Therefore, Hymson Laser Technology GroupLtd has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

Check out our latest analysis for Hymson Laser Technology GroupLtd

In the above chart we have measured Hymson Laser Technology GroupLtd'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 Hymson Laser Technology GroupLtd .

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 7.6% five years ago, while the business's capital employed increased by 282%. That being said, Hymson Laser Technology GroupLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hymson Laser Technology GroupLtd's earnings and if they change as a result from the capital raise.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 64%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 3.3%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

To conclude, we've found that Hymson Laser Technology GroupLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 38% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Hymson Laser Technology GroupLtd has the makings of a multi-bagger.

If you'd like to know more about Hymson Laser Technology GroupLtd, we've spotted 5 warning signs, and 2 of them are a bit concerning.

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.