Hangzhou Huasu TechnologyLtd (SZSE:301157) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Hangzhou Huasu TechnologyLtd (SZSE:301157), 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. To calculate this metric for Hangzhou Huasu TechnologyLtd, this is the formula:

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

0.026 = CN¥28m ÷ (CN¥1.2b - CN¥123m) (Based on the trailing twelve months to June 2024).

So, Hangzhou Huasu TechnologyLtd has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.9%.

View our latest analysis for Hangzhou Huasu TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hangzhou Huasu TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Hangzhou Huasu TechnologyLtd's past further, check out this free graph covering Hangzhou Huasu TechnologyLtd's past earnings, revenue and cash flow.

What Can We Tell From Hangzhou Huasu TechnologyLtd's ROCE Trend?

When we looked at the ROCE trend at Hangzhou Huasu TechnologyLtd, we didn't gain much confidence. Around five years ago the returns on capital were 45%, but since then they've fallen to 2.6%. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Hangzhou Huasu TechnologyLtd has done well to pay down its current liabilities to 10% 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.

The Key Takeaway

While returns have fallen for Hangzhou Huasu TechnologyLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 26% over the last year. 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 about the risks facing Hangzhou Huasu TechnologyLtd, we've discovered 1 warning sign that you should be aware of.

While Hangzhou Huasu TechnologyLtd 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.