Has Hon Hai Precision Industry (TPE:2317) Got What It Takes To Become A Multi-Bagger?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at Hon Hai Precision Industry (TPE:2317) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Hon Hai Precision Industry:

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

0.068 = NT$109b ÷ (NT$3.3t - NT$1.7t) (Based on the trailing twelve months to September 2020).

So, Hon Hai Precision Industry has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

Check out our latest analysis for Hon Hai Precision Industry

Above you can see how the current ROCE for Hon Hai Precision Industry compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hon Hai Precision Industry.

What Does the ROCE Trend For Hon Hai Precision Industry Tell Us?

When we looked at the ROCE trend at Hon Hai Precision Industry, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 6.8%. However it looks like Hon Hai Precision Industry might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, Hon Hai Precision Industry has a high ratio of current liabilities to total assets of 52%. 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.

In Conclusion...

In summary, Hon Hai Precision Industry is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 48% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 2 warning signs for Hon Hai Precision Industry that we think you should be aware of.

While Hon Hai Precision Industry 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.

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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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