There Are Reasons To Feel Uneasy About Hengerda New Materials (Fujian)'s (SZSE:300946) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 briefly looking over the numbers, we don't think Hengerda New Materials (Fujian) (SZSE:300946) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Hengerda New Materials (Fujian), this is the formula:

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

0.085 = CN¥102m ÷ (CN¥1.5b - CN¥301m) (Based on the trailing twelve months to June 2024).

Thus, Hengerda New Materials (Fujian) has an ROCE of 8.5%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.5%.

View our latest analysis for Hengerda New Materials (Fujian)

In the above chart we have measured Hengerda New Materials (Fujian)'s prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hengerda New Materials (Fujian) for free.

What Can We Tell From Hengerda New Materials (Fujian)'s ROCE Trend?

In terms of Hengerda New Materials (Fujian)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.5% from 19% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hengerda New Materials (Fujian). And there could be an opportunity here if other metrics look good too, because the stock has declined 41% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know more about Hengerda New Materials (Fujian), we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

While Hengerda New Materials (Fujian) 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.