Investors Will Want Hunlicar Group's (HKG:3638) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next 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. So on that note, Hunlicar Group (HKG:3638) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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 Hunlicar Group is:

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

0.19 = HK$55m ÷ (HK$492m - HK$208m) (Based on the trailing twelve months to September 2024).

Thus, Hunlicar Group has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 8.0% it's much better.

See our latest analysis for Hunlicar Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hunlicar Group's ROCE against it's prior returns. If you'd like to look at how Hunlicar Group has performed in the past in other metrics, you can view this free graph of Hunlicar Group's past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Hunlicar Group is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 19% on their capital employed. Additionally, the business is utilizing 53% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Hunlicar Group could be selling under-performing assets since the ROCE is improving.

On a separate but related note, it's important to know that Hunlicar Group has a current liabilities to total assets ratio of 42%, 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In a nutshell, we're pleased to see that Hunlicar Group has been able to generate higher returns from less capital. And since the stock has dived 90% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

On a final note, we found 4 warning signs for Hunlicar Group (1 doesn't sit too well with us) you should be aware of.

While Hunlicar Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.