Returns On Capital At HIT Welding IndustryLtd (SZSE:301137) Paint A Concerning Picture

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 investigating HIT Welding IndustryLtd (SZSE:301137), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on HIT Welding IndustryLtd is:

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

0.023 = CN¥31m ÷ (CN¥2.1b - CN¥761m) (Based on the trailing twelve months to September 2023).

Thus, HIT Welding IndustryLtd has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.1%.

View our latest analysis for HIT Welding IndustryLtd

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

So How Is HIT Welding IndustryLtd's ROCE Trending?

In terms of HIT Welding IndustryLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 14% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

In summary, HIT Welding IndustryLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

HIT Welding IndustryLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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.