Returns On Capital At Hilong Holding (HKG:1623) Have Stalled

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Hilong Holding (HKG:1623) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Hilong Holding, this is the formula:

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

0.063 = CN¥389m ÷ (CN¥7.8b - CN¥1.7b) (Based on the trailing twelve months to June 2022).

Therefore, Hilong Holding has an ROCE of 6.3%. On its own, that's a low figure but it's around the 7.0% average generated by the Energy Services industry.

Check out the opportunities and risks within the HK Energy Services industry.

In the above chart we have measured Hilong Holding'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 Hilong Holding.

How Are Returns Trending?

Over the past five years, Hilong Holding'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. With that in mind, unless investment picks up again in the future, we wouldn't expect Hilong Holding to be a multi-bagger going forward.

The Key Takeaway

In summary, Hilong Holding isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 68% over the last five years, 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 found 5 warning signs for Hilong Holding (1 is a bit unpleasant) 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.

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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.