Investors Met With Slowing Returns on Capital At Hongda High-Tech HoldingLtd (SZSE:002144)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Hongda High-Tech HoldingLtd (SZSE:002144), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Hongda High-Tech HoldingLtd is:

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

0.033 = CN¥66m ÷ (CN¥2.2b - CN¥148m) (Based on the trailing twelve months to June 2024).

Therefore, Hongda High-Tech HoldingLtd has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 6.1%.

See our latest analysis for Hongda High-Tech HoldingLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hongda High-Tech HoldingLtd's ROCE against it's prior returns. If you'd like to look at how Hongda High-Tech HoldingLtd has performed in the past in other metrics, you can view this free graph of Hongda High-Tech HoldingLtd's past earnings, revenue and cash flow.

What Can We Tell From Hongda High-Tech HoldingLtd's ROCE Trend?

There hasn't been much to report for Hongda High-Tech HoldingLtd's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Hongda High-Tech HoldingLtd in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Key Takeaway

In a nutshell, Hongda High-Tech HoldingLtd has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly, the stock has only gained 2.7% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know more about Hongda High-Tech HoldingLtd, we've spotted 2 warning signs, and 1 of them can't be ignored.

While Hongda High-Tech HoldingLtd 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.

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.