Some Investors May Be Worried About Hui Lyu Ecological Technology GroupsLtd's (SZSE:001267) Returns On Capital

There are a few key trends to look for if we want to identify the next 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Hui Lyu Ecological Technology GroupsLtd (SZSE:001267), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Hui Lyu Ecological Technology GroupsLtd is:

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

0.042 = CN¥68m ÷ (CN¥2.5b - CN¥862m) (Based on the trailing twelve months to June 2023).

So, Hui Lyu Ecological Technology GroupsLtd has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 5.6%.

View our latest analysis for Hui Lyu Ecological Technology GroupsLtd

In the above chart we have measured Hui Lyu Ecological Technology GroupsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hui Lyu Ecological Technology GroupsLtd .

What Does the ROCE Trend For Hui Lyu Ecological Technology GroupsLtd Tell Us?

In terms of Hui Lyu Ecological Technology GroupsLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 13%, but since then they've fallen to 4.2%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Hui Lyu Ecological Technology GroupsLtd have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 19% return to shareholders over the last year, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing: We've identified 3 warning signs with Hui Lyu Ecological Technology GroupsLtd (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.