Hangzhou Huning Elevator Parts (SZSE:300669) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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 that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.04 = CN¥35m ÷ (CN¥996m - CN¥119m) (Based on the trailing twelve months to June 2024).

Thus, Hangzhou Huning Elevator Parts has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

Check out our latest analysis for Hangzhou Huning Elevator Parts

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hangzhou Huning Elevator Parts' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hangzhou Huning Elevator Parts.

The Trend Of ROCE

In terms of Hangzhou Huning Elevator Parts' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.0%, but since then they've fallen to 4.0%. 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.

Our Take On Hangzhou Huning Elevator Parts' ROCE

In summary, we're somewhat concerned by Hangzhou Huning Elevator Parts' diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 27% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we found 2 warning signs for Hangzhou Huning Elevator Parts (1 is concerning) you should be aware of.

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.

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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.