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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. Although, when we looked at Haoxi Health Technology (NASDAQ:HAO), it didn't seem to tick all of these boxes.
Our free stock report includes 5 warning signs investors should be aware of before investing in Haoxi Health Technology. Read for free now.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Haoxi Health Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = US$772k ÷ (US$22m - US$3.3m) (Based on the trailing twelve months to December 2024).
So, Haoxi Health Technology has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Media industry average of 8.7%.
View our latest analysis for Haoxi Health Technology
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Haoxi Health Technology.
How Are Returns Trending?
When we looked at the ROCE trend at Haoxi Health Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 58% over the last two years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Haoxi Health Technology has done well to pay down its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Haoxi Health 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 Haoxi Health Technology. Despite these promising trends, the stock has collapsed 99% over the last year, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.