Hangzhou IECHO Science&Technology (SHSE:688092) Is Reinvesting At Lower Rates Of Return

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. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Hangzhou IECHO Science&Technology (SHSE:688092) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 IECHO Science&Technology:

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

0.13 = CN¥78m ÷ (CN¥754m - CN¥134m) (Based on the trailing twelve months to June 2024).

So, Hangzhou IECHO Science&Technology has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.5% generated by the Machinery industry.

Check out our latest analysis for Hangzhou IECHO Science&Technology

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

What Does the ROCE Trend For Hangzhou IECHO Science&Technology Tell Us?

When we looked at the ROCE trend at Hangzhou IECHO Science&Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 22% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Hangzhou IECHO Science&Technology has decreased its current liabilities to 18% 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.

Our Take On Hangzhou IECHO Science&Technology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hangzhou IECHO Science&Technology. And there could be an opportunity here if other metrics look good too, because the stock has declined 12% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing to note, we've identified 1 warning sign with Hangzhou IECHO Science&Technology and understanding this should be part of your investment process.

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.