Hottolink (TSE:3680) Is Doing The Right Things To Multiply Its Share Price

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Hottolink (TSE:3680) and its trend of ROCE, we really liked what we saw.

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 Hottolink is:

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

0.027 = JP¥212m ÷ (JP¥8.7b - JP¥1.0b) (Based on the trailing twelve months to March 2024).

So, Hottolink has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Software industry average of 15%.

View our latest analysis for Hottolink

In the above chart we have measured Hottolink's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hottolink for free.

How Are Returns Trending?

Hottolink has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 2.7% on its capital. Not only that, but the company is utilizing 35% more capital than before, but that's to be expected from a company trying to break into profitability. 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.

What We Can Learn From Hottolink's ROCE

To the delight of most shareholders, Hottolink has now broken into profitability. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 1.8% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Hottolink does have some risks though, and we've spotted 3 warning signs for Hottolink that you might be interested in.

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.

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