Some Investors May Be Worried About Hiecise Precision EquipmentLtd's (SZSE:300809) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Hiecise Precision EquipmentLtd (SZSE:300809) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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 Hiecise Precision EquipmentLtd:

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

0.068 = CN¥113m ÷ (CN¥2.1b - CN¥397m) (Based on the trailing twelve months to March 2024).

So, Hiecise Precision EquipmentLtd has an ROCE of 6.8%. On its own that's a low return, but compared to the average of 5.6% generated by the Machinery industry, it's much better.

Check out our latest analysis for Hiecise Precision EquipmentLtd

In the above chart we have measured Hiecise Precision EquipmentLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Hiecise Precision EquipmentLtd .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Hiecise Precision EquipmentLtd doesn't inspire confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 6.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Hiecise Precision EquipmentLtd has done well to pay down its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. 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 Hiecise Precision EquipmentLtd's ROCE

While returns have fallen for Hiecise Precision EquipmentLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 52% over the last three years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 1 warning sign for Hiecise Precision EquipmentLtd that we think you should be aware of.

While Hiecise Precision EquipmentLtd 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.