Returns On Capital Signal Tricky Times Ahead For Hwaway Technology (SZSE:001380)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think Hwaway Technology (SZSE:001380) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 Hwaway Technology, this is the formula:

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

0.13 = CN¥209m ÷ (CN¥2.4b - CN¥758m) (Based on the trailing twelve months to September 2024).

Therefore, Hwaway Technology has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Machinery industry.

Check out our latest analysis for Hwaway Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hwaway Technology's ROCE against it's prior returns. If you're interested in investigating Hwaway Technology's past further, check out this free graph covering Hwaway Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Hwaway Technology Tell Us?

When we looked at the ROCE trend at Hwaway Technology, we didn't gain much confidence. Around four years ago the returns on capital were 17%, but since then they've fallen to 13%. 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 side note, Hwaway Technology has done well to pay down its current liabilities to 31% 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.

The Bottom Line On Hwaway Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Hwaway Technology is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 56% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

Hwaway Technology does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.