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. 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 Beijing Haohan Data TechnologyLtd (SHSE:688292) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. The formula for this calculation on Beijing Haohan Data TechnologyLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = CN¥53m ÷ (CN¥1.3b - CN¥254m) (Based on the trailing twelve months to September 2023).
So, Beijing Haohan Data TechnologyLtd has an ROCE of 5.1%. On its own, that's a low figure but it's around the 4.4% average generated by the Communications industry.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Beijing Haohan Data TechnologyLtd's past further, check out this free graph covering Beijing Haohan Data TechnologyLtd's past earnings, revenue and cash flow.
What Can We Tell From Beijing Haohan Data TechnologyLtd's ROCE Trend?
There are better returns on capital out there than what we're seeing at Beijing Haohan Data TechnologyLtd. Over the past five years, ROCE has remained relatively flat at around 5.1% and the business has deployed 334% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
On a side note, Beijing Haohan Data TechnologyLtd has done well to reduce current liabilities to 19% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
Our Take On Beijing Haohan Data TechnologyLtd's ROCE
As we've seen above, Beijing Haohan Data TechnologyLtd's returns on capital haven't increased but it is reinvesting in the business. And in the last year, the stock has given away 49% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Like most companies, Beijing Haohan Data TechnologyLtd does come with some risks, and we've found 1 warning sign that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.