Qingdao Huicheng Environmental Technology Group (SZSE:300779) Might Be Having Difficulty Using Its Capital Effectively

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Qingdao Huicheng Environmental Technology Group (SZSE:300779) and its ROCE trend, we weren't exactly thrilled.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Qingdao Huicheng Environmental Technology Group, this is the formula:

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

0.051 = CN¥149m ÷ (CN¥3.8b - CN¥887m) (Based on the trailing twelve months to June 2024).

So, Qingdao Huicheng Environmental Technology Group has an ROCE of 5.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.2%.

View our latest analysis for Qingdao Huicheng Environmental Technology Group

Above you can see how the current ROCE for Qingdao Huicheng Environmental Technology Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Qingdao Huicheng Environmental Technology Group for free.

What Does the ROCE Trend For Qingdao Huicheng Environmental Technology Group Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 10.0% five years ago, while capital employed has grown 296%. That being said, Qingdao Huicheng Environmental Technology Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Qingdao Huicheng Environmental Technology Group probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line On Qingdao Huicheng Environmental Technology Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Qingdao Huicheng Environmental Technology Group is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 71% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Qingdao Huicheng Environmental Technology Group (of which 1 doesn't sit too well with us!) that you should know about.

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.