HMT (Xiamen) New Technical Materials (SHSE:603306) Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at HMT (Xiamen) New Technical Materials (SHSE:603306), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on HMT (Xiamen) New Technical Materials is:

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

0.066 = CN¥313m ÷ (CN¥5.1b - CN¥420m) (Based on the trailing twelve months to September 2024).

Thus, HMT (Xiamen) New Technical Materials has an ROCE of 6.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.6%.

See 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, you can check out the forecasts from the analysts covering HMT (Xiamen) New Technical Materials for free.

What Does the ROCE Trend For HMT (Xiamen) New Technical Materials Tell Us?

When we looked at the ROCE trend at HMT (Xiamen) New Technical Materials, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.8% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

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

Bringing it all together, while we're somewhat encouraged by HMT (Xiamen) New Technical Materials' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 175% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 2 warning signs with HMT (Xiamen) New Technical Materials and understanding them should be part of your investment process.

While HMT (Xiamen) New Technical Materials 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.