Capital Allocation Trends At Hangzhou Kaierda Welding RobotLtd (SHSE:688255) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Hangzhou Kaierda Welding RobotLtd (SHSE:688255) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Hangzhou Kaierda Welding RobotLtd is:

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

0.023 = CN¥26m ÷ (CN¥1.3b - CN¥163m) (Based on the trailing twelve months to December 2023).

So, Hangzhou Kaierda Welding RobotLtd has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.1%.

View our latest analysis for Hangzhou Kaierda Welding RobotLtd

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

What Does the ROCE Trend For Hangzhou Kaierda Welding RobotLtd Tell Us?

In terms of Hangzhou Kaierda Welding RobotLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.3% from 17% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Hangzhou Kaierda Welding RobotLtd has decreased its current liabilities to 13% 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 Kaierda Welding RobotLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Hangzhou Kaierda Welding RobotLtd is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 34% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Hangzhou Kaierda Welding RobotLtd (of which 3 are significant!) that you should know about.

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.