Be Wary Of Hangzhou Hikvision Digital Technology (SZSE:002415) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Hangzhou Hikvision Digital Technology (SZSE:002415), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 Hangzhou Hikvision Digital Technology is:

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

0.16 = CN¥15b ÷ (CN¥124b - CN¥34b) (Based on the trailing twelve months to September 2024).

So, Hangzhou Hikvision Digital Technology has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.5% it's much better.

See our latest analysis for Hangzhou Hikvision Digital Technology

Above you can see how the current ROCE for Hangzhou Hikvision Digital Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Hangzhou Hikvision Digital Technology .

The Trend Of ROCE

In terms of Hangzhou Hikvision Digital Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 28% over the last five years. However it looks like Hangzhou Hikvision Digital 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that Hangzhou Hikvision Digital Technology is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 6.7% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching Hangzhou Hikvision Digital Technology, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Hangzhou Hikvision Digital Technology 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.