The Returns On Capital At Jiangsu Hanvo Safety Product (SZSE:300952) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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)

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. 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)

0.074 = CN¥110m ÷ (CN¥2.0b - CN¥528m) (Based on the trailing twelve months to June 2024).

Therefore, Jiangsu Hanvo Safety Product has an ROCE of 7.4%. On its own that's a low return, but compared to the average of 5.6% generated by the Commercial Services industry, it's much better.

See 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 .

What Does the ROCE Trend For Jiangsu Hanvo Safety Product Tell Us?

We weren't thrilled with the trend because Jiangsu Hanvo Safety Product's ROCE has reduced by 69% over the last five years, while the business employed 312% more capital. That being said, Jiangsu Hanvo Safety Product raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. 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. It's also worth noting the company's latest EBIT figure is within 10% of the previous year, so it's fair to assign the ROCE drop largely to the capital raise.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Jiangsu Hanvo Safety Product is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 22% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 2 warning signs for Jiangsu Hanvo Safety Product (1 is a bit concerning) you should be aware of.

While Jiangsu Hanvo Safety Product 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.