What We Make Of Hi Sun Technology (China)'s (HKG:818) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Hi Sun Technology (China)'s (HKG:818) returns on capital, so let's have a look.

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 Hi Sun Technology (China), this is the formula:

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

0.06 = HK$376m ÷ (HK$8.5b - HK$2.2b) (Based on the trailing twelve months to June 2020).

Thus, Hi Sun Technology (China) has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the IT industry average of 8.6%.

Check out our latest analysis for Hi Sun Technology (China)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Hi Sun Technology (China), check out these free graphs here.

So How Is Hi Sun Technology (China)'s ROCE Trending?

We're delighted to see that Hi Sun Technology (China) is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 6.0% on its capital. And unsurprisingly, like most companies trying to break into the black, Hi Sun Technology (China) is utilizing 93% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line On Hi Sun Technology (China)'s ROCE

Overall, Hi Sun Technology (China) gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 24% to shareholders. So with that in mind, we think the stock deserves further research.

One more thing to note, we've identified 2 warning signs with Hi Sun Technology (China) and understanding them should be part of your investment process.

While Hi Sun Technology (China) 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. 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.
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