Investors Could Be Concerned With Huitong Construction GroupLtd's (SHSE:603176) Returns On 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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after investigating Huitong Construction GroupLtd (SHSE:603176), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Huitong Construction GroupLtd, this is the formula:

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

0.10 = CN¥302m ÷ (CN¥5.8b - CN¥2.8b) (Based on the trailing twelve months to September 2024).

So, Huitong Construction GroupLtd has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.1% generated by the Construction industry.

See our latest analysis for Huitong Construction GroupLtd

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

How Are Returns Trending?

In terms of Huitong Construction GroupLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 25%, but since then they've fallen to 10%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Huitong Construction GroupLtd has done well to pay down its current liabilities to 48% of total assets. So we could link some of this to the decrease in ROCE. 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. Keep in mind 48% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Huitong Construction GroupLtd. These growth trends haven't led to growth returns though, since the stock has fallen 54% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 3 warning signs we've spotted with Huitong Construction GroupLtd (including 2 which don't sit too well with us) .

While Huitong Construction GroupLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.