Explore Hengxin Technology's Fair Values from the Community and select yours

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after briefly looking over the numbers, we don't think Hengxin Technology (HKG:1085) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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Understanding Return On Capital Employed (ROCE)

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 Hengxin Technology:

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

0.032 = CN¥112m ÷ (CN¥4.7b - CN¥1.2b) (Based on the trailing twelve months to December 2024).

So, Hengxin Technology has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Communications industry average of 4.1%.

View our latest analysis for Hengxin Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hengxin Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hengxin Technology.

What Can We Tell From Hengxin Technology's ROCE Trend?

We weren't thrilled with the trend because Hengxin Technology's ROCE has reduced by 56% over the last five years, while the business employed 103% more capital. That being said, Hengxin Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hengxin Technology's earnings and if they change as a result from the capital raise.

What We Can Learn From Hengxin Technology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hengxin Technology. These growth trends haven't led to growth returns though, since the stock has fallen 30% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Hengxin Technology does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While Hengxin Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.