There Are Reasons To Feel Uneasy About HAND Enterprise Solutions' (SZSE:300170) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at HAND Enterprise Solutions (SZSE:300170) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for HAND Enterprise Solutions, this is the formula:

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

0.012 = CN¥59m ÷ (CN¥6.0b - CN¥958m) (Based on the trailing twelve months to September 2023).

Thus, HAND Enterprise Solutions has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the IT industry average of 4.3%.

See our latest analysis for HAND Enterprise Solutions

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're interested in investigating HAND Enterprise Solutions' past further, check out this free graph covering HAND Enterprise Solutions' past earnings, revenue and cash flow.

So How Is HAND Enterprise Solutions' ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 11% five years ago, while capital employed has grown 75%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with HAND Enterprise Solutions' earnings and if they change as a result from the capital raise.

What We Can Learn From HAND Enterprise Solutions' ROCE

To conclude, we've found that HAND Enterprise Solutions is reinvesting in the business, but returns have been falling. Since the stock has declined 64% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One final note, you should learn about the 5 warning signs we've spotted with HAND Enterprise Solutions (including 2 which make us uncomfortable) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.