Chengdu Lihang Technology CoLtd (SHSE:603261) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think Chengdu Lihang Technology CoLtd (SHSE:603261) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Chengdu Lihang Technology CoLtd:

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

0.033 = CN¥30m ÷ (CN¥1.1b - CN¥207m) (Based on the trailing twelve months to September 2023).

So, Chengdu Lihang Technology CoLtd has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 5.4%.

See our latest analysis for Chengdu Lihang Technology CoLtd

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

How Are Returns Trending?

In terms of Chengdu Lihang Technology CoLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.3% from 29% five 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.

The Bottom Line

While returns have fallen for Chengdu Lihang Technology CoLtd 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 0.3% over the last year. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we found 4 warning signs for Chengdu Lihang Technology CoLtd (3 don't sit too well with us) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.