Stock Analysis

Returns At Huitongda Network (HKG:9878) Appear To Be Weighed Down

Source: Shutterstock

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Having said that, from a first glance at Huitongda Network (HKG:9878) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. The formula for this calculation on Huitongda Network is:

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

0.054 = CN¥507m ÷ (CN¥31b - CN¥22b) (Based on the trailing twelve months to June 2022).

Thus, Huitongda Network has an ROCE of 5.4%. In absolute terms, that's a low return but it's around the Trade Distributors industry average of 5.6%.

Check out our latest analysis for Huitongda Network

SEHK:9878 Return on Capital Employed March 15th 2023

In the above chart we have measured Huitongda Network'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 report for Huitongda Network.

What The Trend Of ROCE Can Tell Us

Over the past , Huitongda Network's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Huitongda Network in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

On a separate but related note, it's important to know that Huitongda Network has a current liabilities to total assets ratio of 70%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In summary, Huitongda Network isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 20% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 1 warning sign for Huitongda Network that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether Huitongda Network is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis