Yahoo Finance Returns On Capital At Hollysys Automation Technologies (NASDAQ:HOLI) Paint A Concerning Picture
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 briefly looking over the numbers, we don't think Hollysys Automation Technologies (NASDAQ:HOLI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Hollysys Automation Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.087 = US$111m ÷ (US$1.8b - US$498m) (Based on the trailing twelve months to September 2023).
Therefore, Hollysys Automation Technologies has an ROCE of 8.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 12%.
See our latest analysis for Hollysys Automation Technologies
Above you can see how the current ROCE for Hollysys Automation Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hollysys Automation Technologies.
How Are Returns Trending?
When we looked at the ROCE trend at Hollysys Automation Technologies, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.7% from 14% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that Hollysys Automation Technologies is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 28% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
Hollysys Automation Technologies does have some risks though, and we've spotted 1 warning sign for Hollysys Automation Technologies that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
