The Returns On Capital At Hangzhou Honghua Digital Technology Stock (SHSE:688789) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Honghua Digital Technology Stock (SHSE:688789) and its ROCE trend, we weren't exactly thrilled.

What Is 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. To calculate this metric for Hangzhou Honghua Digital Technology Stock, this is the formula:

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

0.13 = CN¥422m ÷ (CN¥4.0b - CN¥838m) (Based on the trailing twelve months to September 2024).

Thus, Hangzhou Honghua Digital Technology Stock has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.2% it's much better.

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 .

How Are Returns Trending?

In terms of Hangzhou Honghua Digital Technology Stock's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 13% from 26% 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.

The Key Takeaway

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. However, despite the promising trends, the stock has fallen 22% over the last three years, 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.

Hangzhou Honghua Digital Technology Stock does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think 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.