There Are Reasons To Feel Uneasy About Hangzhou Jingye Intelligent Technology's (SHSE:688290) Returns On Capital

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Hangzhou Jingye Intelligent Technology (SHSE:688290), we don't think it's current trends fit the mold of a multi-bagger.

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 Jingye Intelligent Technology is:

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

0.0017 = CN¥2.3m ÷ (CN¥1.5b - CN¥193m) (Based on the trailing twelve months to June 2024).

So, Hangzhou Jingye Intelligent Technology has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.5%.

See our latest analysis for Hangzhou Jingye Intelligent Technology

In the above chart we have measured Hangzhou Jingye Intelligent Technology'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 Hangzhou Jingye Intelligent Technology .

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't look fantastic because it's fallen from 31% five years ago, while the business's capital employed increased by 1,780%. That being said, Hangzhou Jingye Intelligent Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Hangzhou Jingye Intelligent Technology might not have received a full period of earnings contribution from it.

On a related note, Hangzhou Jingye Intelligent Technology has decreased its current liabilities to 13% 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.

What We Can Learn From Hangzhou Jingye Intelligent Technology's ROCE

We're a bit apprehensive about Hangzhou Jingye Intelligent Technology because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 38% from where it was year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Hangzhou Jingye Intelligent Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Hangzhou Jingye Intelligent Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.