The Return Trends At Hengtong Logistics (SHSE:603223) Look Promising

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Hengtong Logistics (SHSE:603223) looks quite promising in regards to its trends of return on capital.

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

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 Hengtong Logistics, this is the formula:

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

0.025 = CN¥106m ÷ (CN¥5.0b - CN¥783m) (Based on the trailing twelve months to March 2024).

Therefore, Hengtong Logistics has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 11%.

Check out our latest analysis for Hengtong Logistics

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hengtong Logistics.

What Does the ROCE Trend For Hengtong Logistics Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 2.5%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 265%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 16%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Hengtong Logistics has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Hengtong Logistics' ROCE

All in all, it's terrific to see that Hengtong Logistics is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 75% return over the last five years. In light of that, we think it's worth looking further into this stock because if Hengtong Logistics can keep these trends up, it could have a bright future ahead.

On a final note, we found 2 warning signs for Hengtong Logistics (1 can't be ignored) you should be aware of.

While Hengtong Logistics 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.

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