Hichain LogisticsLtd (SZSE:300873) May Have Issues Allocating Its Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Hichain LogisticsLtd (SZSE:300873), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Hichain LogisticsLtd is:

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

0.062 = CN¥195m ÷ (CN¥3.7b - CN¥593m) (Based on the trailing twelve months to September 2023).

So, Hichain LogisticsLtd has an ROCE of 6.2%. In absolute terms, that's a low return but it's around the Logistics industry average of 7.1%.

See our latest analysis for Hichain LogisticsLtd

In the above chart we have measured Hichain LogisticsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hichain LogisticsLtd .

What Can We Tell From Hichain LogisticsLtd's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 16% five years ago, while the business's capital employed increased by 396%. Usually this isn't ideal, but given Hichain LogisticsLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Hichain LogisticsLtd might not have received a full period of earnings contribution from it.

The Bottom Line

To conclude, we've found that Hichain LogisticsLtd is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 39% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Hichain LogisticsLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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.

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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.