Be Wary Of Finework (Hu Nan) New Energy Technology (SZSE:301232) And Its 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Finework (Hu Nan) New Energy Technology (SZSE:301232), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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 Finework (Hu Nan) New Energy Technology, this is the formula:

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

0.03 = CN¥54m ÷ (CN¥3.0b - CN¥1.2b) (Based on the trailing twelve months to March 2024).

Therefore, Finework (Hu Nan) New Energy Technology has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.6%.

Check out our latest analysis for Finework (Hu Nan) New Energy Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Finework (Hu Nan) New Energy Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Finework (Hu Nan) New Energy Technology.

What Can We Tell From Finework (Hu Nan) New Energy Technology's ROCE Trend?

In terms of Finework (Hu Nan) New Energy Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.0% from 29% 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. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Finework (Hu Nan) New Energy Technology's ROCE

While returns have fallen for Finework (Hu Nan) New Energy Technology 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 34% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Finework (Hu Nan) New Energy Technology (of which 3 are potentially serious!) that you should know about.

While Finework (Hu Nan) New Energy Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com