Hangzhou Robam Appliances (SZSE:002508) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Hangzhou Robam Appliances (SZSE:002508) and its ROCE trend, we weren't exactly thrilled.

What Is 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. The formula for this calculation on Hangzhou Robam Appliances is:

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

0.15 = CN¥1.7b ÷ (CN¥16b - CN¥4.5b) (Based on the trailing twelve months to March 2024).

So, Hangzhou Robam Appliances has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Consumer Durables industry.

Check out our latest analysis for Hangzhou Robam Appliances

In the above chart we have measured Hangzhou Robam Appliances' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Hangzhou Robam Appliances .

How Are Returns Trending?

When we looked at the ROCE trend at Hangzhou Robam Appliances, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 15% from 22% five years ago. However it looks like Hangzhou Robam Appliances might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Hangzhou Robam Appliances is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 10% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing, we've spotted 1 warning sign facing Hangzhou Robam Appliances that you might find interesting.

While Hangzhou Robam Appliances 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.