Shanghai Hugong Electric GroupLtd (SHSE:603131) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Shanghai Hugong Electric GroupLtd (SHSE:603131) and its ROCE trend, we weren't exactly thrilled.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Shanghai Hugong Electric GroupLtd is:

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

0.024 = CN¥40m ÷ (CN¥2.2b - CN¥534m) (Based on the trailing twelve months to June 2024).

Therefore, Shanghai Hugong Electric GroupLtd has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

See our latest analysis for Shanghai Hugong Electric GroupLtd

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 Shanghai Hugong Electric GroupLtd's past further, check out this free graph covering Shanghai Hugong Electric GroupLtd's past earnings, revenue and cash flow.

What Can We Tell From Shanghai Hugong Electric GroupLtd's ROCE Trend?

In terms of Shanghai Hugong Electric GroupLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 6.2%, but since then they've fallen to 2.4%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Shanghai Hugong Electric GroupLtd's ROCE

While returns have fallen for Shanghai Hugong Electric GroupLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 3.0% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Shanghai Hugong Electric GroupLtd does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

While Shanghai Hugong Electric GroupLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.