Investors Could Be Concerned With Hangzhou Gisway Information TechnologyLtd's (SZSE:301390) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Hangzhou Gisway Information TechnologyLtd (SZSE:301390) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. The formula for this calculation on Hangzhou Gisway Information TechnologyLtd is:

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

0.056 = CN¥54m ÷ (CN¥1.1b - CN¥165m) (Based on the trailing twelve months to March 2024).

Therefore, Hangzhou Gisway Information TechnologyLtd has an ROCE of 5.6%. In absolute terms, that's a low return but it's around the Construction industry average of 6.5%.

Check out our latest analysis for Hangzhou Gisway Information TechnologyLtd

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

The Trend Of ROCE

When we looked at the ROCE trend at Hangzhou Gisway Information TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.6% from 21% 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.

On a related note, Hangzhou Gisway Information TechnologyLtd has decreased its current liabilities to 15% 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 Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Hangzhou Gisway Information TechnologyLtd is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 43% over the last year, so there might be an opportunity here for astute investors. 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 4 warning signs for Hangzhou Gisway Information TechnologyLtd (of which 1 is a bit unpleasant!) that you should know about.

While Hangzhou Gisway Information 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.