HMT (Xiamen) New Technical Materials' (SHSE:603306) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at HMT (Xiamen) New Technical Materials (SHSE:603306) and its ROCE trend, we weren't exactly thrilled.

What Is 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. Analysts use this formula to calculate it for HMT (Xiamen) New Technical Materials:

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

0.065 = CN¥302m ÷ (CN¥4.9b - CN¥242m) (Based on the trailing twelve months to March 2024).

Thus, HMT (Xiamen) New Technical Materials has an ROCE of 6.5%. Even though it's in line with the industry average of 6.5%, it's still a low return by itself.

View our latest analysis for HMT (Xiamen) New Technical Materials

Above you can see how the current ROCE for HMT (Xiamen) New Technical Materials compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for HMT (Xiamen) New Technical Materials .

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 10% five years ago, while capital employed has grown 91%. That being said, HMT (Xiamen) New Technical Materials raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. HMT (Xiamen) New Technical Materials 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.

Our Take On HMT (Xiamen) New Technical Materials' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for HMT (Xiamen) New Technical Materials. And the stock has followed suit returning a meaningful 57% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a separate note, we've found 1 warning sign for HMT (Xiamen) New Technical Materials you'll probably want to 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.