Investors Could Be Concerned With Hangjin Technology's (SZSE:000818) Returns On Capital

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Hangjin Technology (SZSE:000818) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Hangjin Technology, this is the formula:

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

0.057 = CN¥269m ÷ (CN¥7.0b - CN¥2.2b) (Based on the trailing twelve months to March 2024).

Therefore, Hangjin Technology has an ROCE of 5.7%. Even though it's in line with the industry average of 5.7%, it's still a low return by itself.

View our latest analysis for Hangjin Technology

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'd like to look at how Hangjin Technology has performed in the past in other metrics, you can view this free graph of Hangjin Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Hangjin Technology Tell Us?

When we looked at the ROCE trend at Hangjin Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.7% from 19% five years ago. However it looks like Hangjin Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Hangjin Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 171% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to continue researching Hangjin Technology, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Hangjin Technology 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.