There Are Reasons To Feel Uneasy About Qingdao Hi-Tech Moulds & Plastics Technology's (SZSE:301022) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Qingdao Hi-Tech Moulds & Plastics Technology (SZSE:301022), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Qingdao Hi-Tech Moulds & Plastics Technology, this is the formula:

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

0.024 = CN¥33m ÷ (CN¥1.9b - CN¥560m) (Based on the trailing twelve months to September 2024).

So, Qingdao Hi-Tech Moulds & Plastics Technology has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.0%.

View our latest analysis for Qingdao Hi-Tech Moulds & Plastics Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Qingdao Hi-Tech Moulds & Plastics Technology's ROCE against it's prior returns. If you're interested in investigating Qingdao Hi-Tech Moulds & Plastics Technology's past further, check out this free graph covering Qingdao Hi-Tech Moulds & Plastics Technology's past earnings, revenue and cash flow.

What Can We Tell From Qingdao Hi-Tech Moulds & Plastics Technology's ROCE Trend?

When we looked at the ROCE trend at Qingdao Hi-Tech Moulds & Plastics Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.4% from 20% 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Qingdao Hi-Tech Moulds & Plastics Technology has decreased its current liabilities to 29% 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 Qingdao Hi-Tech Moulds & Plastics Technology is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 40% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to know some of the risks facing Qingdao Hi-Tech Moulds & Plastics Technology we've found 3 warning signs (2 are concerning!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.