Investors Could Be Concerned With Han's Laser Technology Industry Group's (SZSE:002008) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Han's Laser Technology Industry Group (SZSE:002008), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Han's Laser Technology Industry Group:

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

0.028 = CN¥585m ÷ (CN¥36b - CN¥15b) (Based on the trailing twelve months to September 2023).

Thus, Han's Laser Technology Industry Group has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.0%.

Check out our latest analysis for Han's Laser Technology Industry Group

Above you can see how the current ROCE for Han's Laser Technology Industry Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Han's Laser Technology Industry Group .

So How Is Han's Laser Technology Industry Group's ROCE Trending?

On the surface, the trend of ROCE at Han's Laser Technology Industry Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.8% from 16% five years ago. However it looks like Han's Laser Technology Industry Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

On a side note, Han's Laser Technology Industry Group's current liabilities are still rather high at 41% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

To conclude, we've found that Han's Laser Technology Industry Group is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 52% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Han's Laser Technology Industry Group does have some risks though, and we've spotted 3 warning signs for Han's Laser Technology Industry Group that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.