If you’re hunting for the next big investment, pay attention to key trends. One common strategy is to look for companies whose returns on capital employed (ROCE) are on the rise, along with a growing amount of capital being used. This is a sign that the company reinvests its earnings wisely to generate more profit over time. However, when we examined Hymson Laser Technology Group Ltd (SHSE:688559), it didn’t quite meet these expectations.
What is Return On Capital Employed (ROCE)?
Not familiar with ROCE? It simply measures how much profit a company makes from the capital it uses. The formula to calculate ROCE for Hymson Laser Technology Group Ltd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
For Hymson, this works out to:
0.033 = CN¥142m ÷ (CN¥12b – CN¥7.5b) (Data as of September 2024).
This means Hymson Laser Technology Group Ltd has a ROCE of 3.3%. That’s lower than the Machinery industry average of 5.2%.
The chart above shows Hymson’s past ROCE, but it’s important to focus on the future. If you’re interested in what analysts think, there’s a free analyst report available for Hymson Laser Technology Group Ltd.
How Are Returns Changing?
Sadly, the trend for ROCE isn’t looking great. It has dropped from 7.6% five years ago, even though the capital employed has surged by 282%. Recently, Hymson raised some funds, which could explain the rise in capital employed. However, we need to see how these funds impact earnings in the future.
Another point to consider is that the ratio of current liabilities to total assets has climbed to 64%. This increase could further lower the ROCE, suggesting that suppliers and short-term creditors are funding a significant chunk of the business, which carries some risks.
The Bottom Line
In summary, while Hymson Laser Technology Group Ltd is putting money back into its business, returns are declining. The stock has dropped 38% over the last three years, which may dampen investor hopes for recovery. Based on our analysis, Hymson doesn’t look like a strong candidate for a multi-bagger investment.
For those curious about Hymson Laser Technology Group Ltd, it’s worth noting that we found 5 warning signs, some of which are concerning.
For investors seeking solid companies, there’s a free list available showcasing firms with strong balance sheets and high returns on equity.
Understanding Valuation Made Easy
Discover whether Hymson Laser Technology Group Ltd might be undervalued or overvalued with our thorough analysis. We cover fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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This article is for informational purposes only and does not provide financial advice. We base our insights on historical data and analyst forecasts, using an impartial approach. This is not a recommendation to buy or sell stocks. Please consider your financial situation and objectives before making investment decisions. Note that our analysis may not include the latest news or qualitative information. Simply Wall St does not hold shares in any mentioned companies.
