There Are Reasons To Feel Uneasy About Hangzhou Seck Intelligent Technology's (SZSE:300897) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Hangzhou Seck Intelligent Technology (SZSE:300897) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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 Hangzhou Seck Intelligent Technology, this is the formula:

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

0.097 = CN¥96m ÷ (CN¥1.3b - CN¥282m) (Based on the trailing twelve months to June 2024).

Therefore, Hangzhou Seck Intelligent Technology has an ROCE of 9.7%. On its own that's a low return, but compared to the average of 5.4% generated by the Electronic industry, it's much better.

See our latest analysis for Hangzhou Seck Intelligent Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hangzhou Seck Intelligent Technology's ROCE against it's prior returns. If you're interested in investigating Hangzhou Seck Intelligent Technology's past further, check out this free graph covering Hangzhou Seck Intelligent Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Hangzhou Seck Intelligent Technology Tell Us?

On the surface, the trend of ROCE at Hangzhou Seck Intelligent Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.7% from 26% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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

Bringing it all together, while we're somewhat encouraged by Hangzhou Seck Intelligent Technology's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 11% in the last three years. Therefore based on the analysis done in this article, we don't think Hangzhou Seck Intelligent Technology has the makings of a multi-bagger.

If you'd like to know about the risks facing Hangzhou Seck Intelligent Technology, we've discovered 1 warning sign that you should be aware of.

While Hangzhou Seck Intelligent 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.