Investors Will Want Hangzhou Advance Gearbox Group's (SHSE:601177) Growth In ROCE To Persist

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. With that in mind, we've noticed some promising trends at Hangzhou Advance Gearbox Group (SHSE:601177) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Hangzhou Advance Gearbox Group:

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

0.011 = CN¥35m ÷ (CN¥4.7b - CN¥1.6b) (Based on the trailing twelve months to March 2024).

Therefore, Hangzhou Advance Gearbox Group has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.6%.

See our latest analysis for Hangzhou Advance Gearbox Group

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're interested in investigating Hangzhou Advance Gearbox Group's past further, check out this free graph covering Hangzhou Advance Gearbox Group's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 1.1%. The amount of capital employed has increased too, by 58%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 34%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Hangzhou Advance Gearbox Group's ROCE

All in all, it's terrific to see that Hangzhou Advance Gearbox Group is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 26% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Hangzhou Advance Gearbox Group does have some risks though, and we've spotted 1 warning sign for Hangzhou Advance Gearbox Group that you might be interested in.

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.