Hynar Water Group (SZSE:300961) Could Be Struggling To Allocate Capital

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. 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 Hynar Water Group (SZSE:300961) 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Hynar Water Group, this is the formula:

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

0.0096 = CN¥17m ÷ (CN¥2.8b - CN¥1.0b) (Based on the trailing twelve months to March 2024).

Therefore, Hynar Water Group has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 4.8%.

See our latest analysis for Hynar Water Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hynar Water Group'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 Hynar Water Group.

How Are Returns Trending?

On the surface, the trend of ROCE at Hynar Water Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.0% from 15% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Hynar Water Group's ROCE

In summary, Hynar Water Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 73% in the last three years. Therefore based on the analysis done in this article, we don't think Hynar Water Group has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with Hynar Water Group (at least 2 which don't sit too well with us) , and understanding these would certainly be useful.

While Hynar Water Group 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.