Returns On Capital At Hangzhou Gisway Information TechnologyLtd (SZSE:301390) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. 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)

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 Gisway Information TechnologyLtd, this is the formula:

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

0.052 = CN¥49m ÷ (CN¥1.4b - CN¥440m) (Based on the trailing twelve months to June 2024).

Thus, Hangzhou Gisway Information TechnologyLtd has an ROCE of 5.2%. On its own, that's a low figure but it's around the 5.7% average generated by the Construction industry.

View 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'd like to look at how Hangzhou Gisway Information TechnologyLtd has performed in the past in other metrics, you can view this free graph of Hangzhou Gisway Information TechnologyLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Hangzhou Gisway Information TechnologyLtd Tell Us?

On the surface, the trend of ROCE at Hangzhou Gisway Information TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.2% from 21% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

While returns have fallen for Hangzhou Gisway Information 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 25% 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.

On a separate note, we've found 2 warning signs for Hangzhou Gisway Information TechnologyLtd you'll probably want to 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.

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.