Here's What's Concerning About Hongli Group's (NASDAQ:HLP) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Hongli Group (NASDAQ:HLP), we don't think it's current trends fit the mold of a multi-bagger.

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What Is Return On Capital Employed (ROCE)?

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 Hongli Group, this is the formula:

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

0.025 = US$1.4m ÷ (US$68m - US$12m) (Based on the trailing twelve months to June 2025).

Thus, Hongli Group has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 11%.

Check out our latest analysis for Hongli Group

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

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 40% five years ago, while the business's capital employed increased by 737%. Usually this isn't ideal, but given Hongli Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Hongli Group might not have received a full period of earnings contribution from it.

On a related note, Hongli Group has decreased its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hongli Group. Furthermore the stock has climbed 12% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing: We've identified 3 warning signs with Hongli Group (at least 2 which can't be ignored) , and understanding them would certainly be useful.

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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.