Zhuzhou Huarui Precision Cutting ToolsLtd (SHSE:688059) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Having said that, from a first glance at Zhuzhou Huarui Precision Cutting ToolsLtd (SHSE:688059) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Zhuzhou Huarui Precision Cutting ToolsLtd:

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

0.099 = CN¥186m ÷ (CN¥2.5b - CN¥635m) (Based on the trailing twelve months to September 2024).

So, Zhuzhou Huarui Precision Cutting ToolsLtd has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.3%.

See our latest analysis for Zhuzhou Huarui Precision Cutting ToolsLtd

In the above chart we have measured Zhuzhou Huarui Precision Cutting ToolsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhuzhou Huarui Precision Cutting ToolsLtd .

How Are Returns Trending?

We weren't thrilled with the trend because Zhuzhou Huarui Precision Cutting ToolsLtd's ROCE has reduced by 53% over the last five years, while the business employed 390% more capital. Usually this isn't ideal, but given Zhuzhou Huarui Precision Cutting ToolsLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Zhuzhou Huarui Precision Cutting ToolsLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line

In summary, Zhuzhou Huarui Precision Cutting ToolsLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last three years, the stock has given away 22% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about Zhuzhou Huarui Precision Cutting ToolsLtd, we've spotted 4 warning signs, and 2 of them shouldn't be ignored.

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.