We Like These Underlying Return On Capital Trends At Hengtong Logistics (SHSE:603223)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Hengtong Logistics' (SHSE:603223) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hengtong Logistics:

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

0.026 = CN¥118m ÷ (CN¥5.5b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

Thus, Hengtong Logistics has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 10.0%.

Check out our latest analysis for Hengtong Logistics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hengtong Logistics' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hengtong Logistics.

The Trend Of ROCE

We're delighted to see that Hengtong Logistics is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 2.6% on its capital. And unsurprisingly, like most companies trying to break into the black, Hengtong Logistics is utilizing 300% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Hengtong Logistics has decreased current liabilities to 19% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Hengtong Logistics has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Hengtong Logistics' ROCE

To the delight of most shareholders, Hengtong Logistics has now broken into profitability. And a remarkable 221% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, Hengtong Logistics does come with some risks, and we've found 1 warning sign that you should be aware of.

While Hengtong Logistics isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.