Hangzhou Hikvision Digital Technology (SZSE:002415) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Hangzhou Hikvision Digital Technology (SZSE:002415) and its ROCE trend, we weren't exactly thrilled.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Hangzhou Hikvision Digital Technology, this is the formula:

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

0.19 = CN¥16b ÷ (CN¥119b - CN¥33b) (Based on the trailing twelve months to December 2023).

Thus, Hangzhou Hikvision Digital Technology has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.3% it's much better.

View 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 .

What Can We Tell From Hangzhou Hikvision Digital Technology's ROCE Trend?

On the surface, the trend of ROCE at Hangzhou Hikvision Digital Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 19% from 39% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

On a related note, Hangzhou Hikvision Digital Technology has decreased its current liabilities to 28% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Hangzhou Hikvision Digital Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Hangzhou Hikvision Digital Technology's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 7.3% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Hangzhou Hikvision Digital Technology does have some risks though, and we've spotted 1 warning sign for Hangzhou Hikvision Digital Technology that you might be interested in.

While Hangzhou Hikvision Digital 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.