Hsino Tower Group's (SHSE:601096) Returns On Capital Not Reflecting Well On The Business

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Hsino Tower Group (SHSE:601096) and its ROCE trend, we weren't exactly thrilled.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Hsino Tower Group is:

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

0.058 = CN¥254m ÷ (CN¥9.5b - CN¥5.2b) (Based on the trailing twelve months to September 2024).

So, Hsino Tower Group has an ROCE of 5.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.

See our latest analysis for Hsino Tower Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hsino Tower Group's ROCE against it's prior returns. If you'd like to look at how Hsino Tower Group has performed in the past in other metrics, you can view this free graph of Hsino Tower Group's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Hsino Tower Group doesn't inspire confidence. Over the last four years, returns on capital have decreased to 5.8% from 26% four years ago. 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 separate but related note, it's important to know that Hsino Tower Group has a current liabilities to total assets ratio of 54%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Hsino Tower Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Hsino Tower Group is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 18% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Like most companies, Hsino Tower Group does come with some risks, and we've found 1 warning sign that you should be aware of.

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.