Some Investors May Be Worried About Jiangsu Hanvo Safety Product's (SZSE:300952) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Jiangsu Hanvo Safety Product (SZSE:300952), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Jiangsu Hanvo Safety Product:

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

0.077 = CN¥112m ÷ (CN¥1.9b - CN¥449m) (Based on the trailing twelve months to March 2024).

Therefore, Jiangsu Hanvo Safety Product has an ROCE of 7.7%. On its own that's a low return, but compared to the average of 4.8% generated by the Commercial Services industry, it's much better.

View our latest analysis for Jiangsu Hanvo Safety Product

Above you can see how the current ROCE for Jiangsu Hanvo Safety Product compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangsu Hanvo Safety Product .

So How Is Jiangsu Hanvo Safety Product's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 23% five years ago, while capital employed has grown 333%. Usually this isn't ideal, but given Jiangsu Hanvo Safety Product conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Jiangsu Hanvo Safety Product might not have received a full period of earnings contribution from it.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Jiangsu Hanvo Safety Product. And there could be an opportunity here if other metrics look good too, because the stock has declined 26% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 2 warning signs with Jiangsu Hanvo Safety Product (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

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.

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.