Hangzhou Honghua Digital Technology Stock (SHSE:688789) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. 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 Honghua Digital Technology Stock (SHSE:688789) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Hangzhou Honghua Digital Technology Stock is:

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

0.13 = CN¥391m ÷ (CN¥3.5b - CN¥538m) (Based on the trailing twelve months to December 2023).

Therefore, Hangzhou Honghua Digital Technology Stock has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 6.1% generated by the Machinery industry.

View our latest analysis for Hangzhou Honghua Digital Technology Stock

Above you can see how the current ROCE for Hangzhou Honghua Digital Technology Stock compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Hangzhou Honghua Digital Technology Stock .

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 27% five years ago, while capital employed has grown 636%. That being said, Hangzhou Honghua Digital Technology Stock 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 Honghua Digital Technology Stock might not have received a full period of earnings contribution from it.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Hangzhou Honghua Digital Technology Stock is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 6.5% over the last year. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you're still interested in Hangzhou Honghua Digital Technology Stock it's worth checking out our FREE intrinsic value approximation for 688789 to see if it's trading at an attractive price in other respects.

While Hangzhou Honghua Digital Technology Stock may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.