There Are Reasons To Feel Uneasy About Hangzhou Zhongya Machinery's (SZSE:300512) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Hangzhou Zhongya Machinery (SZSE:300512) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Hangzhou Zhongya Machinery:

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

0.006 = CN¥10m ÷ (CN¥2.7b - CN¥992m) (Based on the trailing twelve months to March 2024).

Therefore, Hangzhou Zhongya Machinery has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.6%.

Check out our latest analysis for Hangzhou Zhongya Machinery

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Hangzhou Zhongya Machinery's past further, check out this free graph covering Hangzhou Zhongya Machinery's past earnings, revenue and cash flow.

So How Is Hangzhou Zhongya Machinery's ROCE Trending?

When we looked at the ROCE trend at Hangzhou Zhongya Machinery, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. However it looks like Hangzhou Zhongya Machinery might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that Hangzhou Zhongya Machinery is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Hangzhou Zhongya Machinery does have some risks, we noticed 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

While Hangzhou Zhongya Machinery 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.