What Do The Returns On Capital At Happiness Biotech Group (NASDAQ:HAPP) Tell Us?
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 investigating Happiness Biotech Group (NASDAQ:HAPP), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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. To calculate this metric for Happiness Biotech Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$9.3m ÷ (US$94m - US$5.9m) (Based on the trailing twelve months to September 2020).
So, Happiness Biotech Group has an ROCE of 11%. In isolation, that's a pretty standard return but against the Personal Products industry average of 13%, it's not as good.
Check out our latest analysis for Happiness Biotech Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Happiness Biotech Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Happiness Biotech Group, check out these free graphs here.
What Does the ROCE Trend For Happiness Biotech Group Tell Us?
When we looked at the ROCE trend at Happiness Biotech Group, we didn't gain much confidence. Over the last three years, returns on capital have decreased to 11% from 55% three years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a side note, Happiness Biotech Group has done well to pay down its current liabilities to 6.3% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
What We Can Learn From Happiness Biotech Group's ROCE
We're a bit apprehensive about Happiness Biotech Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 42% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
Happiness Biotech Group does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
While Happiness Biotech Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. 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.
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