Capital Allocation Trends At Hang Zhou Radical Energy-Saving Technology (SZSE:300652) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Hang Zhou Radical Energy-Saving Technology (SZSE:300652), we don't think it's current trends fit the mold of a multi-bagger.

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 Hang Zhou Radical Energy-Saving Technology is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.081 = CN¥111m ÷ (CN¥1.8b - CN¥383m) (Based on the trailing twelve months to September 2024).

Thus, Hang Zhou Radical Energy-Saving Technology has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Auto Components industry average of 6.9%.

See our latest analysis for Hang Zhou Radical Energy-Saving 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 Hang Zhou Radical Energy-Saving Technology.

So How Is Hang Zhou Radical Energy-Saving Technology's ROCE Trending?

In terms of Hang Zhou Radical Energy-Saving Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 10%, but since then they've fallen to 8.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Hang Zhou Radical Energy-Saving Technology has decreased its current liabilities to 22% of total assets. That could partly explain why the ROCE has dropped. 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.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Hang Zhou Radical Energy-Saving Technology is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 53% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we found 3 warning signs for Hang Zhou Radical Energy-Saving Technology (1 is a bit concerning) you should be aware of.

While Hang Zhou Radical Energy-Saving Technology 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.

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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.