The Returns On Capital At Hang Xiao Steel StructureLtd (SHSE:600477) Don't Inspire Confidence

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Hang Xiao Steel StructureLtd (SHSE:600477), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Hang Xiao Steel StructureLtd:

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

0.055 = CN¥397m ÷ (CN¥16b - CN¥8.8b) (Based on the trailing twelve months to September 2024).

Therefore, Hang Xiao Steel StructureLtd has an ROCE of 5.5%. Even though it's in line with the industry average of 6.1%, it's still a low return by itself.

View our latest analysis for Hang Xiao Steel StructureLtd

Above you can see how the current ROCE for Hang Xiao Steel StructureLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hang Xiao Steel StructureLtd for free.

What Can We Tell From Hang Xiao Steel StructureLtd's ROCE Trend?

On the surface, the trend of ROCE at Hang Xiao Steel StructureLtd doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 5.5%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Another thing to note, Hang Xiao Steel StructureLtd has a high ratio of current liabilities to total assets of 55%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Hang Xiao Steel StructureLtd have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 22% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Hang Xiao Steel StructureLtd does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Hang Xiao Steel StructureLtd 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.