Be Wary Of Hangzhou Huning Elevator Parts (SZSE:300669) And Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating Hangzhou Huning Elevator Parts (SZSE:300669), we don't think it's current trends fit the mold of a multi-bagger.

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 Huning Elevator Parts:

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

0.03 = CN¥27m ÷ (CN¥1.0b - CN¥120m) (Based on the trailing twelve months to September 2024).

Thus, Hangzhou Huning Elevator Parts has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.2%.

See our latest analysis for Hangzhou Huning Elevator Parts

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 Huning Elevator Parts' past further, check out this free graph covering Hangzhou Huning Elevator Parts' past earnings, revenue and cash flow.

What Does the ROCE Trend For Hangzhou Huning Elevator Parts Tell Us?

When we looked at the ROCE trend at Hangzhou Huning Elevator Parts, we didn't gain much confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 3.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

We're a bit apprehensive about Hangzhou Huning Elevator Parts because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these concerning fundamentals, the stock has performed strongly with a 59% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Hangzhou Huning Elevator Parts does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.