Haibo Heavy Engineering Science and Technology (SZSE:300517) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Haibo Heavy Engineering Science and Technology (SZSE:300517), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 Haibo Heavy Engineering Science and Technology is:

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

0.012 = CN¥15m ÷ (CN¥1.7b - CN¥441m) (Based on the trailing twelve months to March 2024).

So, Haibo Heavy Engineering Science and Technology has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.5%.

Check out our latest analysis for Haibo Heavy Engineering Science and Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Haibo Heavy Engineering Science and Technology's ROCE against it's prior returns. If you'd like to look at how Haibo Heavy Engineering Science and Technology has performed in the past in other metrics, you can view this free graph of Haibo Heavy Engineering Science and Technology's past earnings, revenue and cash flow.

So How Is Haibo Heavy Engineering Science and Technology's ROCE Trending?

In terms of Haibo Heavy Engineering Science and Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.2% from 6.8% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Haibo Heavy Engineering Science and Technology has done well to pay down its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Haibo Heavy Engineering Science and Technology's ROCE

In summary, we're somewhat concerned by Haibo Heavy Engineering Science and Technology's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 33% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we found 4 warning signs for Haibo Heavy Engineering Science and Technology (2 shouldn't be ignored) you should be aware of.

While Haibo Heavy Engineering Science and Technology 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.

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