Longhua Technology GroupLtd (SZSE:300263) Has More To Do To Multiply In Value Going Forward

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Longhua Technology GroupLtd (SZSE:300263), it didn't seem to tick all of these boxes.

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. To calculate this metric for Longhua Technology GroupLtd, this is the formula:

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

0.043 = CN¥192m ÷ (CN¥6.1b - CN¥1.7b) (Based on the trailing twelve months to September 2023).

So, Longhua Technology GroupLtd has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.2%.

View our latest analysis for Longhua Technology GroupLtd

In the above chart we have measured Longhua Technology GroupLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Longhua Technology GroupLtd for free.

What Can We Tell From Longhua Technology GroupLtd's ROCE Trend?

In terms of Longhua Technology GroupLtd's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 4.3% for the last five years, and the capital employed within the business has risen 57% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

In conclusion, Longhua Technology GroupLtd has been investing more capital into the business, but returns on that capital haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 5.8% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Longhua Technology GroupLtd does have some risks though, and we've spotted 1 warning sign for Longhua Technology GroupLtd that you might be interested in.

While Longhua Technology GroupLtd 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.