Here's What To Make Of Hangzhou Greatstar Industrial's (SZSE:002444) Decelerating Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Hangzhou Greatstar Industrial (SZSE:002444) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Hangzhou Greatstar Industrial, this is the formula:

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

0.098 = CN¥1.5b ÷ (CN¥21b - CN¥5.6b) (Based on the trailing twelve months to September 2023).

Therefore, Hangzhou Greatstar Industrial has an ROCE of 9.8%. In absolute terms, that's a low return but it's around the Consumer Durables industry average of 8.3%.

Check out our latest analysis for Hangzhou Greatstar Industrial

Above you can see how the current ROCE for Hangzhou Greatstar Industrial 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 Hangzhou Greatstar Industrial .

How Are Returns Trending?

The returns on capital haven't changed much for Hangzhou Greatstar Industrial in recent years. The company has consistently earned 9.8% for the last five years, and the capital employed within the business has risen 103% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Hangzhou Greatstar Industrial's ROCE

In summary, Hangzhou Greatstar Industrial has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 87% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 1 warning sign for Hangzhou Greatstar Industrial you'll probably want to know about.

While Hangzhou Greatstar Industrial isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.