Hangzhou Huasu TechnologyLtd (SZSE:301157) Might Be Having Difficulty Using Its Capital Effectively

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Hangzhou Huasu TechnologyLtd (SZSE:301157) 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)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.03 = CN¥32m ÷ (CN¥1.2b - CN¥115m) (Based on the trailing twelve months to September 2024).

Therefore, Hangzhou Huasu TechnologyLtd has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.8%.

See our latest analysis for Hangzhou Huasu TechnologyLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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?

In terms of Hangzhou Huasu TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.0% from 39% five years ago. 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 related note, Hangzhou Huasu TechnologyLtd has decreased its current liabilities to 9.6% of total assets. So we could link some of this to the decrease in ROCE. 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 Bottom Line On Hangzhou Huasu TechnologyLtd's ROCE

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. And the stock has done incredibly well with a 116% return over the last year, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about Hangzhou Huasu TechnologyLtd, we've spotted 2 warning signs, and 1 of them is a bit concerning.

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.