Some Investors May Be Worried About Hangzhou Kaierda Welding RobotLtd's (SHSE:688255) Returns On Capital

What trends should we look for it we want to identify stocks that can 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Hangzhou Kaierda Welding RobotLtd (SHSE:688255) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Hangzhou Kaierda Welding RobotLtd:

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

0.016 = CN¥16m ÷ (CN¥1.2b - CN¥183m) (Based on the trailing twelve months to June 2024).

Thus, Hangzhou Kaierda Welding RobotLtd has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

Check out 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're interested in investigating Hangzhou Kaierda Welding RobotLtd's past further, check out this free graph covering Hangzhou Kaierda Welding RobotLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Hangzhou Kaierda Welding RobotLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.6% from 13% 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 15% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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

While returns have fallen for Hangzhou Kaierda Welding RobotLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 30% over the last year, so there might be an opportunity here for astute investors. 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 2 warning signs we've spotted with Hangzhou Kaierda Welding RobotLtd (including 1 which is potentially serious) .

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.